Investments, Financing Constraints and Buyouts : The Effect of Private Equity Investors on the Sensitivity of Investments to Cash Flow

The paper examines the relationship between investments and cash flows for a panel of 204 low- and medium-technology firms located in the UK, France, Italy and Spain, 108 of which underwent a buyout between 1997 and 2004. The control sample of non-buyouts is selected through a propensity score matching methodology. I investigate whether, after firms obtain PE financing in buyout transactions, their investment rates are both lower and more sensitive to cash flows. In addition, I analyze the effect exerted by the characteristics of the deal and the investing funds. I compare results from countries belonging to different legal systems and exhibiting different levels of development of the private equity industry (English versus French legal origin countries). The results highlight that the sensitivity of investments to cash flows is increased if firms obtain equity financing from PE investors, while investment levels do not seem to be affected after a buyout However, differential effects emerge when considering the framework conditions in which investee firms operate and the typology and characteristics of investing funds