DP11075 Private Equity?s Unintended Dark Side: On the Economic Consequences of Excessive Delistings

Author(s): Alexander P. Ljungqvist, Lars Persson, Joacim Tåg
Publication Date: January 2016
Keyword(s): delistings, investment, political economy, private equity, productivity, stock market
JEL(s): G24, G34, P16
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11075

Over the past two decades, private equity has contributed to a shrinking of the U.S. stock market. We develop a political economy model of private equity activity to study the wider economic consequences of this trend. We show that private and social incentives to delist firms from the stock market are not always aligned. Private equity firms could inadvertently impose an externality on the economy by reducing citizen-investors? exposure to corporate profits and thus undermining popular support for business-friendly policies. This can lead to long-term reductions in aggregate investment, productivity, and employment.