Do Politics Shape Buyout Performance?

In this interesting article summary from the Harvard Business Review, Oliver F. Gottschalg and Aviad A. Pe’er make the case that buyouts conducted in "Red" (Republican) states outperform those made in "Blue" states by a significant amount.

Here's a quote:

This key conclusion of our study, which looked at 5,870 U.S. buyouts by private equity firms made between 1980 and 2003, points to serious inefficiencies in the market for corporate acquisitions. In an efficient market, the average risk-adjusted rate of return on investments in identical target companies located in different states should be the same. Our research, however, found that the average return in red states was 3% above the mean (and as much as 17% above it in the best-performing red state—Oklahoma). The average return in blue states was 6% below the mean (and as much as 21% below it in the worst-performing state—Michigan). Yet 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: Using data on the returns from actual buyouts, we constructed two hypothetical funds—one that invested only in companies located in red states, and the other only in companies in blue states, and found that the first fund achieved a 9% higher annual net internal rate of return.

Can we extrapolate and conclude that firms do better under national policies that mirror those of Red states (such as right-to-work, the ability to close underperforming business units without interference, etc.)? The coming four-to-eight years should provide some data to support or debunk that hypothesis.