Resource Rechanneling and Management Upgrading in Owner-driven Reorganization: Private Equity Buyouts and Worker Earnings

Amid waves of buyouts, activist investors have battered the separation of ownership and control. How does management by financial markets and firms affect worker earnings? I theorize a strategic axis from resource rechanneling, in which organizations shunt resources toward owners at the expense of workers, to managerial upgrading, in which organizations improve operations in a way that magnifies the earnings of higher-educated workers. I then theorize that investor-controlled organizations will focus more on resource rechanneling when financial markets provide opportunities for returns via financial reorganization. I test this argument by matching federal administrative pay data to all private equity buyouts of U.S. publicly traded companies. This allows the first-ever estimates of the effect of private equity on U.S. workers’ pay. I find that buyouts reliably reduce earnings for non-college workers. For college workers, buyouts reduce pay when debt is cheap (resource rechanneling) and raise pay when debt is expensive (managerial upgrading). Moves to other employers help to explain these inequality effects. The worker-level impact of financial ownership depends on financial market opportunities for value appropriation above the usual value creation strategies.