I study the effects of private equity (PE) buyouts on labor productivity using a novel micro-data on investments in PE funds and PE buyout deals, combined with confidential Census data. I show that while PE increased productivity at target firms until 2011, it substantially decreased productivity post 2011. In the time series, the decrease in labor productivity is correlated with an increase in capital from the most underfunded public pensions. In the cross-section, I show that firms financed predominantly by the most underfunded public pensions experience a -5.2% annual change in labor productivity, as compared to firms financed by other investors which experience a +5.2% annual change. Firms supported by low quality PE funds face productivity decreases. The key mechanism is the notion of desperate capital, where the most underfunded public pensions allocate capital to low quality GPs, and realize lower PE returns. I introduce a novel instrument of public unionization rates to establish support for underfunded positions causing selection into low quality GPs, which ultimately leads to capital misallocation within private markets.

This paper demonstrates that private equity buyouts relax firms' financing constraints by enabling them to borrow against cash flows. Unlike comparable non PE-backed firms that primarily use asset-based debt, PE-backed firms rely extensively on cash flow-based debt subject to earnings-based borrowing constraints, and their borrowing and investments exhibit high sensitivity to earnings. Thus, private equity raises both the level and cash flow sensitivity of leverage. Documenting that PE sponsors inject equity and stabilize earnings in distress, we highlight how PE sponsors' involvement in distress resolution serves as a key mechanism that enables cash flow-based borrowing.

This paper studies the interactions between corporate law and venture capital (VC) exits by acquisitions, an increasingly common source of VC-related litigation. We find that transactions by VC funds under liquidity pressure are characterized by (i) a substantially lower sale price; (ii) a greater probability of industry outsiders as acquirers; (iii) a positive abnormal return for acquirers. These features indicate the existence of fire sales, which often satisfy VCs' liquidation preferences but hurt common shareholders, leaving board members with conflicting fiduciary duties and litigation risks. Exploiting an important court ruling that establishes the board’s fiduciary duties to common shareholders as a priority, we find that after the ruling maturing VCs become less likely to exit by fire sales and they distribute cash to their investors less timely. However, VCs experience more difficult fundraising ex-ante, highlighting the potential cost of a common-favoring regime. Overall, the evidence has important implications for optimal fiduciary duty design in VC-backed start-ups.