Browsing by Author "Robinson, David T"

This dissertation studies the incentives of private equity (PE) fund managers. In the first chapter, I study how the management fee structures of funds shape their incentives. I find that one of the most common management fee structures in the industry - changing fee bases at the end of the investment period from committed capital to invested capital - creates an agency problem where the managers overinvest to receive more management fees. Importantly, this finding implies that that the investors face a trade-off when choosing this fee structure. Changing fee bases in this way reduces management fees, but it also creates an overinvestment problem.

In the second chapter, I examine what determines the nature of the operational changes that the PE fund managers bring to their portfolio companies. In the context of PE ownership of nursing homes in the U.S., I find that the PE fund managers improve quality of care of their nursing homes by hiring more skilled nurses, but only at the nursing homes in competitive markets. In contrast, in concentrated markets, PE fund managers fire nurses which lowers quality of care. Overall, this chapter shows that the competition in the product market largely shapes the effects of PE ownership on consumer welfare. Importantly,this finding implies that policy makers may use pro-competition policies to assuage negative effects of PE ownership on consumer welfare. Consistent with this finding, this chapter shows that PE-owned nursing homes responded more strongly to the introduction of the star-rating system at the end of 2008.

In the final chapter of this dissertation, I examine how the incentives of the PE fund managers change in times of crisis. To do this, I examine the effects of PE ownership on nursing homes during COVID-19. In the media, there were several accusations that the PE investors make nursing homes more vulnerable to COVID-19. This chapter shows that PE-ownership is actually associated with a lower likelihood of having a COVID-19 outbreak, and a lower likelihood of nursing homes being short of Personal Protective Equipments for their nurses and patients. These findings are consistent with the view that PE investors help their portfolio companies survive through crises by bringing both management expertise and capital injections to their portfolio companies.

The first essay of my dissertation introduces a new method for eliciting market beliefs about the expected outcomes of a merger negotiation after announcement. During a merger negotiation, the market prices of the firms involved

reflect beliefs about their values both in the merged and

standalone states, as well as the likelihood of either outcome.

These beliefs determine stock price reactions to news of a possible

merger, but those prices alone do not contain sufficient information

to identify the latent beliefs that they reflect. I develop a new

method which, by using additional data in the form of option prices,

is able to identify these beliefs. This method allows for a clear

decomposition of a negotiating firm's expected value change into two

parts: the value of the transaction to the firm, and new information

about its standalone value. Previous research into estimating

merger synergies has struggled to obtain an appropriate alternative

against which to measure the realized outcome. The market's beliefs

about state-contingent firm values give an estimate of both. Through

a direct comparison of the estimates of a firm's value in both the

merged and standalone states, I obtain a strong, practical measure

of the expected value-creating potential of a merger before its

consummation.

The second essay applies the state-contingent payoff estimation method developed previously to addressing questions about the size effect in mergers. A growing body of evidence indicates that large acquisitions destroy value. However, we do not yet know why. Several theories have been advanced, but their effects are difficult to observe in isolation. It has thus been impossible to tell whether negative post-announcement acquirer returns are caused by market expectations of value-destroying acquisitions or revealed bad news about standalone value. This paper resolves this issue by decomposing expectations about merger outcomes into expected value change from completing the acquisition and revision of beliefs about standalone firm value. The data show that deal size is correlated with value destruction, while acquirer size is correlated with release of unfavorable information. Deal size correlates with value destruction, acquirer size with bad news about the firm. Furthermore, the results suggest that overpayment is a prerequisite for large acquisitions. These findings reduce the set of possible theoretical explanations for the size effect.

This dissertation explores the role of executive compensation in determining the capital structure decisions of a firm. CEOs experience a large personal cost of default that interacts through the risk adjusted probability of default with their compensation contract. Since default happens in a particularly costly state of the world for a CEO whose compensation contract consists primarily of pay for performance elements, i.e. a CEO who has a large personal equity stake in the firm, a large pay performance sensitivity is negatively and significantly associated with firm leverage choice. I document this effect in detail for the first time, and I show that it is both statistically robust and significant in magnitude, approximately 1\% of firm value. I show that this effect is driven by the stock holdings of the CEO, not the option holdings. I provide a simple principal agent model that explains the observed negative relationship and makes additional predictions on the relationship of other firm characteristics to pay performance sensitivity and leverage. I then test and confirm these predictions empirically using a standard OLS framework and an instrumental variable approach to control for endogeneity in the compensation contract. I also look at leverage adjustment speeds and show that CEOs with higher pay performance sensitivity adjust leverage upwards towards target values more slowly and downwards more quickly than their peers, and I interpret this as direct evidence that CEOs are actively managing personal risk through firm leverage choice.

This dissertation consists of two essays investigating participation effects in household financial decisions. In the first essay, entitled "Household Mortgage Choice and Mortgage Market Participation," I empirically study a household's choice of an adjustable rate mortgage (ARM) over a fixed rate mortgage (FRM) across time. This decision has been investigated in the cross-section previously, but to date, no one has studied how a household's choice of mortgage contract type changes as they gain experience in the mortgage market. This study investigates whether mortgage market participation has a systematic effect on the choice of an ARM vs. an FRM within a household. Using the Panel Study of Income Dynamics (PSID) and the Survey of Consumer Finances (SCF), I document a novel stylized fact: a household's propensity to choose an adjustable rate ARM over an FRM increases with the number of previous mortgages the household has used. Households do not choose an ARM due to budget or liquidity constraints when increasing housing consumption; nor is the observed pattern of increased propensity to choose an ARM with mortgage market participation explained by the simultaneous relaxation of budget constraints as homeowners participate in the mortgage market. Stabilization of a household's income stream and rising home prices are also ruled out as the source of increasing ARM choice propensity with greater utilization of mortgages, as is expected length of tenure. Evidence is presented supporting the hypothesis that households learn about mortgage products by participating in the market.

In the second essay, entitled "Participation Effects in Refinancing Decisions", I investigate household refinancing decisions in the context of market participation. Using optimal refinance interest rate differentials as derived in Agarwal, Driscoll and Laibson (2013), I document an important participation effect in the Panel Study of Income Dynamics, whereby households with greater mortgage market participation, as measured by previous mortgages used, are more likely to refinance optimally. This result is robust to potential liquidity constraints, where the household fails to refinance due to an inability to pay any fixed costs associated with the transaction. Participation effects persist even when controlling for the potential of equity extraction as the primary motivation for refinancing. These results are consistent with an information acquisition model, whereby households gain knowledge and understanding of financial transactions by participating in financial markets.

This dissertation explores the effects of private equity (PE) investment on product quality among healthcare providers. In the first essay, I study the determinants of PE manager behavior, focusing on the role of product market competition. Using the nursing home setting as a backdrop, I consider the broader question of whether and how product market competition shapes the impact of PE acquisitions on consumers. By studying acquisitions of skilled nursing facilities by PE firms, I find that PE-owned providers exhibit greater competitive sensitivity—in that they compete more aggressively when competitive incentives are comparatively strong, and exploit market power more aggressively when competitive incentives are comparatively weak.

To investigate whether PE managers respond differently than non-PE managers to competition, I consider two sources of variation in competitive incentives facing nursing homes. First, I exploit the fact that nursing homes compete with one another in geographically segmented markets to contrast facilities according to the levels of local competition they face. I find significant heterogeneity in the effect of PE ownership according to levels of local market concentration. In highly competitive markets, PE owners increase staffing by $101,783 worth of care annually (enough to increase registered nurse (RN) hours by 20.8% of the mean), while actually reducing staffing in less competitive markets. Second, I show that PE-owned nursing homes respond more strongly to policies intended to spur competition. I study the introduction of the Five-Star Quality Rating System, a policy that increased the salience of staffing for consumers. Following its introduction, PE-owned facilities increased their staffing by an average of $39,118 worth of care more than their non-PE counterparts. Moreover, PE managers more aggressively shift their staffing composition towards RNs in response to the rating system's specific emphasis on RN staffing (RN expenditure increasing by 14.7% of the mean, with licensed practical nurse (LPN) expenditure decreasing by 4.9% of the mean): in total, the share of RN staffing increased by 1.9 percentage points (17.3% of the mean) more than non-PE facilities.

In the second essay, I assess how PE acquisitions influenced the readiness and outcomes of nursing facilities during the onset of the COVID-19 pandemic. With over 40% of U.S. COVID-19 deaths occurring in nursing homes, long-term care is a critical setting in which we must better understand the impact of PE ownership during the coronavirus pandemic. I find PE ownership to be associated with a mean decrease in the probability of confirmed COVID-19 cases among residents by 7.1 percentage points and confirmed staff cases by 5.4 percentage points. PE was also associated with a decreased probability of PPE shortages—including N95 masks, surgical masks, eyewear, gowns, gloves, and hand sanitizer. However, facilities previously (but not presently) owned by PE firms did not fare similarly well. I observe that prior PE ownership may result in increased PPE shortages and a potentially greater likelihood of resident outbreaks. This suggests that the contribution of PE ownership to improved COVID-19 outcomes is a result of active management during the pandemic, rather than the legacy of interventions undertaken beforehand.

This paper establishes the life-cycle dynamics of Corporate Venture Capital (CVC) to explore the information acquisition role of CVC investment in the process of corporate innovation. I exploit an identification strategy that allows me to isolate exogenous shocks to a firm's ability to innovate. Using this strategy, I first find that the CVC life cycle typically begins following a period of deteriorated corporate innovation and increasingly valuable external information, lending support to the hypothesis that firms conduct CVC investment to acquire information and innovation knowledge from startups. Building on this analysis, I show that CVCs acquire information by investing in companies with similar technological focus but have a different knowledge base. Following CVC investment, parent firms internalize the newly acquired knowledge into internal R&D and external acquisition decisions. Human capital renewal, such as hiring inventors who can integrate new innovation knowledge, is integral in this step. The CVC life cycle lasts about four years, terminating as innovation in the parent firm rebounds. These findings shed new light on discussions about firm boundaries, managing innovation, and corporate information choices.