Non-pecuniary Benefits: Evidence from the Location of Private Company Sales
57 Pages Posted: 13 Apr 2014 Last revised: 28 Sep 2020
Date Written: September 25, 2020
Non-pecuniary factors are believed to play a crucial role in the decisions of entrepreneurs. We estimate how the non-pecuniary benefits related to the quality-of-life (e.g., clement weather) of a target firm's location affect its acquisition price. Using new data on private firm acquisitions, we find that firms in cities with a higher quality-of-life sell for an average premium of 15.8% over comparable firms in cities with a lower quality-of-life, and this premium is likely driven by entrepreneurs who buy target firms to relocate. Notably, the premium disappears when the firm is acquired by investors who value the firm as a purely financial asset. Using historical wage-to-housing cost differentials to instrument for the quality-of-life, we show that the premium for non-pecuniary amenities of a city is in addition to any premium for city characteristics (e.g., agglomeration economies) that affect firm fundamentals.
Keywords: Private Equity, Valuation, Geography, Amenities, Entrepreneurship
JEL Classification: G02, G32, G34, J32, L26, R39
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