Should I stay or should I go? - Exploring the causal operating performance impact of private equity ownership in family firms

Abstract: Using a unique dataset from Sweden, this paper explores the causal impact of private equity ownership on operating performance in family firms. We study 69 Swedish leveraged buyouts (LBOs) and find evidence that target firms become more profitable and grow much faster compared to a carefully selected control group. The results are statistically significant, economically large and hold when controlling for firm and time fixed effects and pre-trends. We observe higher growth rates for firms selling during the first generation of ownership, but the profitability increase is consistent regardless of the seller's ownership length. In order to compensate for private equity funds' "cherry-picking" abilities and other endogenous aspects of LBOs, we study family characteristics. Specifically, we use the variation in the decision to sell to a private equity fund that comes from the gender of the principal owner's first-born child as an instrumental variable (IV). Although we find indications that the gender of the first-born child has an impact on the likelihood of selling to a private equity fund, our IV estimates are consistent with those obtained using ordinary least squares. Overall, we provide robust evidence of the positive impact private equity ownership can have on family firms.