Abstract

The PEF has no unlimited resources for dedicating infinite amounts of effort to each individual company in her portfolio, and she faces the standard opportunity costs of effort (cf. Shepherd et al. 2005). We assert PEF’s are undiversified investors who have a strong incentive to maximize the value of each individual investment (cf. Sorensen and Stuart, 2008). Even though prior research shows whether and how PEF effort creates value in the investee firm, it remains unknown how much effort the PEF should add in the case of buyouts. We aim to fill the gap by proposing an integrated theory that addresses whether value is created by defining the components of value (creation), how value is created by describing the action-outcome relationship, and how much effort is dedicated by analyzing the distinct roles of the PEF and the entrepreneur of the investee firm. Our theory seeks optimal PEF effort levels for value creation in private equity-backed buyouts.

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