Newswise — FAYETTEVILLE, Ark. – The private equity industry has grown rapidly over the past 25 years. With this growth, private equity firms have increased their involvement in politics, which many view as controversial.

In a new study published in the Journal of Finance, a University of Arkansas finance professor and his colleague at Purdue University found that some private equity firms, despite their reputation as job destroyers, increased employment following a buyout. Most of these firms had political connections, and the jobs they created or retained after buyouts were concentrated during election years in swing states or states that the researchers identified as having “high corruption.”

“The general perception of private equity firms is they slash and burn after a buyout,” said Scott Hsu, assistant professor in the Sam M. Walton College of Business. “But we found the opposite for those firms with political connections. These firms, on average, actually created more jobs after buyouts, or at least eliminated fewer jobs, than firms with no political connections. When we dug a little deeper, we discovered that, on average, these firms tended to increase employment in election years, especially in states with greater corruption.”

Using U.S. Justice Department information on public corruption convictions, the researchers measured state corruption as the ratio of the number of public corruption convictions in a state over a 10-year period, 2001 to 2010, divided by the state’s population in 2010. They defined a state as “corrupt” if the quotient was above the median.

Private equity is a class of assets – both securities and debt – in companies traded on a stock exchange. A private equity firm manages investments for these companies through various strategies, usually leveraged buyouts but also venture capital. As the industry has grown over the past 25 years, firms have increased their involvement in politics. Private equity and investment firms contributed $50 million to candidates during the 2014 election cycle alone, according to the website

Firms’ greater and controversial involvement in politics motivated Hsu and Mara Faccio, finance professor at Purdue University, to do the study. They found that, on average, employment at companies with political connections increased by 1.24 percent every year. Companies that were not politically connected experienced employment increases, too, but those were much more modest – an increase of only 0.33 percent annually.

To determine a possible connection between politicians and private equity firms boosting employment, Hsu and Faccio combined data from several sources. Capital IQ enabled them to identify 3,748 firms that were acquired by private equity firms between 1990 and 2012. The National Establishment Time Series database, which provides annual sales and employment data for more than 52 million U.S. companies, allowed the researchers to track employment and growth at the targeted firms and their establishments, which included 20,000 subsidiaries, manufacturing plants and branches.

Hsu and Faccio established political connections by first gathering biographical information on senior employees at private equity firms. They classified a firm as politically connected if at least one general partner, board member or top executive had served in a major political office – U.S. Congress, governor or president – or was affiliated with someone in those roles during the period of the study. The researchers found that 14 percent of the 1,690 private equity firms covered in their sample were politically connected. A third of the acquired firms, 1,265, were purchased in group buyouts where at least one of the buyers was a politically connected private equity firm.

“Based on the number of politically connected indiviuals representing these firms, and the firms that later had boosts in employment, we think our findings suggest a possible exchange of favors between some private equity firms and incumbent politicians,” Hsu said.


Scott Hsu, assistant professor, finance
Sam M. Walton College of Business
479-575-2316, [email protected]

Matt McGowan, science and research communications officer
University Relations
479-575-4246, [email protected]


Journal Link: Journal of Finance