Why Do Corporate Buyouts Perform Better in Red States?

A recent study shows that companies involved in private equity buyouts perform significantly better in red states than blue states -- but the authors are not quite sure why.

The Harvard Business Review article (read a summary and see the colored map), written before the presidential election, reviewed the results of 6000 private equity buyouts between 1980 and 2003. The conclusion: the average return in red states was 3 percent above the mean while the average return in blue states was 6 percent below.

Authors Oliver Gottschalg and Aviad A. Pe'er don't put forward an answer for their findings but point out that the buyout environment embraces aggressive restructurings, layoffs, outsourcing and other "value creation" mechanisms that are more aligned with Republican values than those of Democrats.

Many PE firms are aware of this red-blue market imperfection and exploit it. "A company headquartered in a red state was 27 percent more likely to undergo a buyout than an otherwise identical company based in a blue state," the authors write.

Still, Gottschalg and Pe'er wonder why state color is not used more in valuation models to assess potential corporate buyouts.

"Most acquirers and sellers don't seem to accurately consider local factors in the valuation methods they apply. The economic consequences of this oversight can be substantial..."