Private Equity and the Organization of Firms
Abstract
"Private equity (PE) buyouts are often associated with improvements in firms’ operating performance, implying that value creation under PE ownership is closely tied to changes in how firms are organized and managed. This paper examines how buyouts reshape organizational structures related to firms’ organizational capabilities, including hierarchical depth, managerial control spans, and the allocation of employment across organizational functions. We show that PE buyouts lead firms to develop deeper managerial hierarchies and narrower managerial control spans, making organizations more top-heavy even after accounting for firm growth. At the same time, employment shifts away from product-related functions toward specialized finance and management functions.We document these patterns using a novel dataset combining 10,461 U.S. leveraged buyouts completed between 2008 and 2020 with worker-level resume information that allows us to reconstruct firms’ hierarchical structure, managerial control spans, job functions, and workforce composition at a monthly frequency. Using a difference-in-differences event-study design with matched control firms, we track how firms’ internal organization evolves around buyouts.
The organizational changes coincide with a substantial expansion of specialized executive roles, largely filled through external hires with prior senior leadership or private equity experience. Organizational restructuring is further reflected in elevated turnover among top managers and wage increases concentrated in higher hierarchical layers. Overall, the evidence points to a strengthening of firms’ organizational capabilities under PE ownership. Importantly, these organizational changes persist after PE exit, suggesting that buyouts leave durable organizational structures within firms."