Private equity buyouts and workplace safety∗

This paper presents evidence of a large, persistent decline in establishment-level workplace injury rates after private equity (PE) buyouts of publicly-traded firms but not already-private firms. Cross-sectional evidence further links the public-firm postbuyout decline to alleviation of market pressure to focus on short-term performance. Employment drops more in low-injury risk establishments, and the fall in injury rates does not correlate with reductions in employment post-buyout, suggesting that systematic outsourcing of dangerous jobs or underreporting due to layoff concerns is unlikely to explain the results. Overall, our results suggest a novel dimension on which buyouts improve firms’ fundamental operational competencies. ∗Jonathan Cohn: [email protected], (512) 232-6827. Nicole Nestoriak: [email protected], (202) 691-7408. Malcolm Wardlaw: [email protected], (972) 883-5903. This paper previously circulated under the title “How do private equity buyouts impact employee working conditions? Evidence from workplace safety records.” We would like to thank Andres Almazan, Aydoğan Altı, Shai Bernstein, Christa Bouwman, Andres Dongangelo, Cesare Fracassi, Mariassunta Giannetti, John Griffin, Mark Jansen, Steve Kaplan, Adam Kolasinski, Sam Krueger, Tim Landvoigt, Josh Lerner, Inessa Liskovich, Daniel Metzger, David Robinson, Albert Sheen, Laura Starks, Per Strömberg, Sheridan Titman, Mindy Zhang, seminar participants at the Aalto University, University of Amsterdam, Stockholm School of Economics, University of Texas-Austin, Texas A&M, University of Utah, and participants at the 2016 Young Scholars Finance Conference and 2017 Western Finance Association meeting for comments. Private equity buyouts and workplace safety Abstract This paper presents evidence of a large, persistent decline in establishment-level workplace injury rates after private equity (PE) buyouts of publicly-traded firms but not already-private firms. Cross-sectional evidence further links the public-firm postbuyout decline to alleviation of market pressure to focus on short-term performance. Employment drops more in low-injury risk establishments, and the fall in injury rates does not correlate with reductions in employment post-buyout, suggesting that systematic outsourcing of dangerous jobs or underreporting due to layoff concerns is unlikely to explain the results. Overall, our results suggest a novel dimension on which buyouts improve firms’ fundamental operational competencies.This paper presents evidence of a large, persistent decline in establishment-level workplace injury rates after private equity (PE) buyouts of publicly-traded firms but not already-private firms. Cross-sectional evidence further links the public-firm postbuyout decline to alleviation of market pressure to focus on short-term performance. Employment drops more in low-injury risk establishments, and the fall in injury rates does not correlate with reductions in employment post-buyout, suggesting that systematic outsourcing of dangerous jobs or underreporting due to layoff concerns is unlikely to explain the results. Overall, our results suggest a novel dimension on which buyouts improve firms’ fundamental operational competencies. Growing evidence suggests that private equity (PE) buyouts result in significant operating improvements in acquired firms (Davis et al. (2014), Bernstein and Sheen (2016)). However, the nature of the operational changes underlying these improvements remains largely a matter of conjecture. Identifying the sources of operating improvements in buyouts is essential for understanding whether and how PE firms contribute to the economy. These gains could reflect fundamental increases in productivity or merely a redistribution of rents from employees, suppliers, and other corporate stakeholders to investors through the extraction of concessions. Such expropriation is consistent with concerns voiced by PE industry critics as well as theoretical arguments that acquirers capture rents by reneging on implicit commitments inherited from previous owners (Shleifer and Summers, 1988). In general, a lack of detailed data on characteristics of firms’ operations makes it difficult to investigate the nature of operational changes after buyouts. This paper overcomes the data challenge by analyzing establishment-level workplace safety records from the Bureau of Labor Statistics’ (BLS’) annual Survey of Injuries and Illnesses (SOII). Workplace safety outcomes reflect choices about the way a firm organizes and executes its operations and therefore provide a lens into the nature of operational changes accompanying buyouts. Evidence of a strong negative relationship between workplace injury rates and firm value (Cohn and Wardlaw, 2016) suggests that these outcomes are value-relevant. At a broader level, workplace safety is a major policy issue, with estimates of the cost of treating workplace injuries and illnesses in the U.S. exceeding $250 billion per year (Leigh, 2011).1 Our main finding is a large, sustained decline in workplace injury rates after PE buyouts of publicly-traded firms in the 1990s and 2000s, both in absolute terms and relative to samples of control establishments constructed using several different approaches. Difference1The BLS reports 2.9 million U.S. private-sector workplace injuries and illnesses and 4,836 fatalities in 2015 (https://www.bls.gov/news.release/osh.nr0.htm). Globally, the International Labour Organization (ILO) reports 430 million occupational injuries and illnesses and 355,000 fatalities per year (among 3 billion workers), costing an estimated 4% of global GDP (https://www.ilo.org/legacy/english/protection/safework/worldday/facts_eng.pdf).