ABSTRACT
The role of private equity (PE) firms in buyouts has mainly been developed from the perspectives of agency theory and entrepreneurship theory. This chapter focuses on the part of this literature that has analyzed the effect of buyouts on capital expenditures, other types of investment, and financing constraints. Policy makers are often concerned that these leveraged buyouts make portfolio firms over-indebted. They are also concerned that PE investors have a short-term planning horizon and therefore cut investments, especially those with a long-term character. PE firms can contribute to reducing under- investment in firms with growth perspectives and reducing over-investment in firms with managers that tend to waste free cash flow. The chapter summarizes the effects of buyouts on investment from a theoretical point of view. It introduces the empirical methodology employed by empirical studies and related findings. The chapter discusses methodological problems in the existing literature and suggestions for future research, and the final section concludes.
