Open-market purchases of public equity by private equity investors: Size and home-bias effects

This paper analyses 689 open-market purchases of public equity by private equity investors (PEIs) between 1999 and 2008. On average, we find a positive market reaction to the public announcement of such purchases in both the short and long term. Based on the long-term event study approach of Mitchell and Stafford (2000), we also found that a portfolio of stocks bought by private equity investors achieves a yearly alpha of between 8.5% and 13.5%. In general, the short-term alphas and the long-term alphas are more pronounced when private equity investors buy a listed stock of their home country than when they invest abroad. This justifies a home bias in private equity investments. We also found that investment in small capitalized stocks produces higher excess returns than an investment in large stocks. The abnormal returns are lower for longer time periods, but they are significant in the short-term and over a 1-year horizon. Thus, we find evidence for a size effect in private equity investments.