Effort of Private Equity in Management Buy-outs



This paper uses a case based approach to explore the dynamic adjustment in effort by the private equity investor in management buy-outs. With the utility maximization theory and expectancy theory of Vroom (1964) we disentangle the cascade of action-outcome relations that together lead to value creation. Within-case analysis and cross-case comparisons from four buyout firms are used to capture how the private equity investors update the expectations, how they gauge the proximity to the goal and how they adjust effort. The evidence supports regularly updating of value creation expectations and the evaluations of action-outcome relations that are instrumental to achieve the desired value creation. Our analysis contributes to opening of the black box of PE effort in buyout investments. Claims regarding the negative effects of PE on value creation are not supported by this study.
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Sebastian Gryglewicz