Castellaneta Salvato LRP 2018 - Culminating Events and Time Working Together

Long Range Planning 51 (2018) 865e880
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Long Range Planning

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Culminating events and time working together in top

management teams: Insights from private equity
Francesco Castellaneta a, *, Carlo Salvato b
a
SKEMA Business School, Universit ^te d'Azur (GREDEG), Department of Strategy, Entrepreneurship and Economics, 06902, Sophia
e Co
Antipolis France
b
Bocconi University, Department of Management and Technology, ICRIOS Research Center, 20136, Milan, Italy
a b s t r a c t
In some managerial contexts, performance is measured by the results of a rare event that is itself the culmination of a long and ongoing
process of daily decision making. In the private equity (PE) industry, for example, a firm makes a limited number of investments
throughout its life. However, selecting these few investments requires the firm to engage in a large number of decision-making activities
to evaluate the much larger array of potential investments. This raises the interesting possibility that the performance of each culminating
event is not a function of the number of previously completed tasks, as it has been conceived previously, but is in fact a function of the
accumulation of daily decision making that may or may not culminate in actual buyouts. To understand performance drivers in this and
similar contexts, we examine and test the performance effect of the time that members of a PE top management team (TMT) spend
working together to evaluate potential investments, and untangle this effect from the number of investments the TMT has bought and
sold previously. Our data reveal a U-shaped relationship between time working together (TWT) and buyout performance, and a
moderation effect of TMT heterogeneity and TMT support staff size. These findings extend our knowledge of executive decision making in
PE firms, and in all managerial contexts where rare decision events are the culmination of an extended process of daily decision making.
© 2017 Elsevier Ltd. All rights reserved.
Introduction
Upper echelons theory highlights the influence of top management teams (TMTs), comprising the most influential ex-
ecutives in an organization, over strategic choices and outcomes (Carpenter et al., 2004; Hambrick, 2007; Finkelstein et al.,
2009). This theory assumes that because strategic decision making is inherently complex, outcomes such as strategies and
firm performance are more plausibly determined by the TMT, rather than by a few all-powerful individuals such as CEOs
(Thompson, 1967). Moreover, strategic objectives that are identified and initiated by TMTs are likely to be assigned more-
capable learning resources and a higher priority relative to objectives that emerge from middle management (Laamanen
et al.,2017 in press). The literature has therefore explored how TMT characteristics such as age, education, experience, and
functional background affect individual and group cognition, leading to impacts on firm performance (Amason and Mooney,
2008; Boone and van Witteloostuijn, 2007; Carpenter, 2002; Hambrick and Mason, 1984).
Researchers investigating the link between TMT characteristics and performance have paid particular attention to in-
dicators that capture the joint experience that TMT members accumulate (Barkema and Shvyrkov, 2007; Carpenter, 2002),
focusing almost exclusively on business firms. In this context, TMTs are simultaneously engaged in a diverse array of decision
types. Some occur frequently (e.g., the periodic evaluation and assignment of resources to business units; Finkelstein et al.,
2009); others, such as M&As or direct investments to enter new geographic areas (Barkema and Shvyrkov, 2007; Nadolska
and Barkema, 2014), are relatively rare. The experience a TMT accumulates when engaged in frequent decision-making ac-
tivities may therefore influence the performance it achieves with rare decision events, and vice versa. However, it has so far
* Corresponding author.
E-mail addresses: francesco.castellaneta@skema.edu (F. Castellaneta), carlo.salvato@unibocconi.it (C. Salvato).
http://dx.doi.org/10.1016/j.lrp.2017.08.006
0024-6301/© 2017 Elsevier Ltd. All rights reserved.
866 F. Castellaneta, C. Salvato / Long Range Planning 51 (2018) 865e880
proven difficult to investigate the role of TMT members' accumulated experience on decision performance in the context of
business firms, and “for the most part it has not provided cumulative insights” (Hambrick et al., 2015: 449).
Our study contributes to filling this gap by investigating the link between TMT experience and performance in the context
of private equity firms (PE firms). PE-sector TMT members engage in extended periods of daily decision-making that
culminate in a small number of rare decision events: executing equity investments in other firmsdcalled buyoutsdin order
to resell their ownership share at a profit. Measures of these rare decisionsdi.e., the IRR on a buyout bought and solddare
then used to ascertain performance. PE firms are important actors in the M&A market because in many countries they “now
account for one quarter of the total merger and acquisition activity of all firms” (Fruhan, 2006: 1). Despite the unique features
of the decision-making processes of executives in PE firms, and their relevance in the M&A market, their TMTs have not
received targeted research attention (Zarutskie, 2010).
TMTs in PE firms are an excellent context for investigating managerial decision-making in which frequent TMT in-
teractions lead to rare decision events. Because PE firms follow very stringent investment criteria, they make very few in-
vestments throughout their life, and each decision to invest (or not) is the culmination of a large number of daily decision-
making activities. Indeed, to make a single investment, executives at a median-sized PE firm review 80 potential investments,
hold 20 meetings with the management teams of potential targets, start four negotiations, and conduct three due diligences.
This means that “the median private equity firm spends 80% of its man hours on deals that do not close” (Jacobius, 2011:
online, January 13).
In sum, in the PE context, whereas an actual investment is rare, the activities related to assessing potential investments are
not. Therefore, a PE firm and its management team accumulate experience about the investment process even in the absence
of an actual investment. The scarcity of actual investments calls for work in a PE context that looks beyond these rare events to
identify additional factors that explain how learning happens (Carmeli et al., 2012; Easton and Rosenzweig, 2012). We suggest
that in PE firms the average amount of time that each pair of TMT members collaborates to evaluate potential equity
investmentsdwhat we call Time Working Together (TWT)dshapes how well that pair learns to work together. Therefore, we
expect that TWT affects buyout performance over and above what the literature conceptualizes as Experience Working
Together (EWT; Reagans et al., 2005)dthat is, the number of buyout investments a TMT has bought and sold.
Detailed data on 185 buyouts by 17 PE firms and their executives allowed us to explore how a PE firm's TMTdthe in-
vestment committeedaffects buyout performance. We tracked the professional backgrounds and activity of all 128 executives
in these firms and the amount of time that each pair of executives spent working together. We examined how TWT affects
buyout performance, controlling for the number of buyout investments the firm ultimately bought and sold. To strengthen our
understanding of the boundary conditions of the TWTebuyout performance link, we also investigated two potential moder-
ators: heterogeneity in the professional backgrounds of TMT members, and the size of the staff a TMT has for support.
While exploring the under-studied phenomenon of top-management decisions in PE firms, our study offers important
contributions for the wider literature on TMTs and strategic decision making. This literature has recently shifted its attention to
the microdynamics that affect how TMT members' characteristics jointly impact decision making and decision outcomes
(Kisfalvi et al., 2016). In particular, attention is increasingly being directed toward the joint learning that accumulates when TMT
members engage in routine interactions, and to how these interactions shape joint cognition and decision making within TMTs
(Garbuio et al., 2015; Laamanen et al., 2017). We first disentangle the impact of the frequent (i.e., buyout evaluations) and rare
(i.e., buyout investments) decision events. This contribution is important in any TMT decision-making context in which the
outcomes that determine performance are measured not by frequent, ongoing decisions, but by a rare “culminating” event
based on those decisions. Second, we develop theory on the TWT-performance link in culminating decisions by finding a U-
shaped relationship. This outcome suggests that the time spent working together is an important driver of performance in this
context, and that the effectdnegative or positivedof TWT on performance depends on its level. Interestingly, our data show
that the impact of culminating decisionsdnumber of buyout investmentsdbecomes insignificant when controlling for TWT.
Third, by including TMT heterogeneity and the support that the TMT receives from the rest of the organization, we shed new
light on factors that may strengthen or weaken the impact of TWT on performance. Finally, we present the first study of the
TWT-performance link in the context of TMTs in PE firms, which are characterized by two salient features: a highly stable
membership and a clearly traceable link between specific decisions and their objectively measurable performance. This move
allows us to enhance our understanding of the antecedents of PE firms' performance, and to suggest that further research in
similar empirical contexts will be fruitful for further illuminating the relationship between TMTs and performance.
Theory
The TMT in PE firms
The TMT in PE firms comprises a cohesive team of executives who make all major decisions about buyouts (Jones and
Cannella Jr, 2011; Kaplan and Stromberg, 2009). Most members of this team, which is often called the investment commit-
tee, have managerial or financial backgrounds; some have both. The team works together throughout the investment process
(Tyebjee and Bruno, 1984), from deal origination (seeking potential investments) to deal screening (review of business plans
and investment memorandums), deal evaluation (in-depth due diligence on the deals that pass the screen), deal structuring
(establishing and negotiating the terms of the investments), deal execution (the actual acquisition), and deal value addition
(increasing the value of the acquired businesses).
F. Castellaneta, C. Salvato / Long Range Planning 51 (2018) 865e880 867
The coordination of a buyout's various phases is usually assigned to a single TMT memberdthe lead investment pro-
fessionaldwho acts as an interface between the acquired company and other TMT members, making sure that all analyses and
reports are performed punctually and correctly. However, the TMT holds joint responsibility for the choices made in relation
to each buyout and for its final performance. Tasks performed by TMT members in PE firms are therefore highly interde-
pendent, and members' goals and rewards are linked to the overall TMT's objectives and performance. As stated in a
document on the investment process at one of the PE firms we investigated:
The Investment Committee is responsible for defining the investment strategy of the Fund, guiding due diligence, and
reviewing investment memoranda. Prior to any legally binding commitment by the Fund, the Investment Committee of
the Fund meets to discuss and approve each investment opportunity.
The fact that investment committee members are jointly responsible for decisions related to the companies they acquire
allows researchers to trace a direct link between the set of executives composing a PE firm's TMT and the performance of the
firm. Moreover, TMT membership in PE firms is fairly stable. Therefore, the average amount of time that each pair of TMT
members spends working togetherdhere, their Time Working Together (TWT)dis relevant to how TMT members learn to
work together, independent of the number of buyout investments they ultimately execute. In this context, whereas expe-
rience working together is captured by the number of equity investments a TMT bought and sold, time working together
proxies for the overall number of potential investment candidates that a TMT evaluated, including those that were not ul-
timately executed.
Based on this understanding, we distinguish between two components of learning: a team's Experience Working Together
(EWT), measured by the number of rare, culminating decisions a TMT executes (in this context, buyout investments bought
and sold), and the amount of time TMT decision makers spend working together (TWT). We propose that when decisions
with observable performance are rare, but the decision activities related to them are frequent, both dimensions of decision
making will influence learning and performance.
Hypothesis development
Time working together within investment committees in PE firms
Based on the theoretical insights of the learning literature, we expect that TWT benefits performance through two
mechanisms: higher effectiveness of decision making and higher coordination among TMT members.
The effectiveness of TMT decision making increases with the amount of time the team works together (Gardner et al.,
2012). Consensus decisions by teams that have worked together for a long time may virtually eliminate instances of bad
decisions, and will in most cases result in higher quality decisions than would be possible for even the group's most
knowledgeable member alone. The influence of TWT on TMT effectiveness is expected to be important also in PE firms and,
therefore, to gradually increase the positive impact of TWT on buyout performance. TMTs in PE firms have high horizontal
interdependence (Hambrick et al., 2015) because members' tasks and responsibility are highly interdependent. As TMT
members' opinions about a buyout rely largely on the exchange of detailed, subtle, and often tacit knowledge, intensive
discussions among team members are necessary to improve the quality and effectiveness of information-processing and the
resulting decision-making. Formal and informal information exchange and elaboration occur daily. As one TMT member in a
PE firm told us:
[PE firms' TMT members] meet periodically to discuss pending investment opportunities and portfolio company status.
The lead investment professional reports on the progress of due diligence for investments under consideration. The
other professionals provide strategic guidance. This collaboration continues outside the formal investment committee
structure with frequent information sharing, brainstorming, issue surfacing, and other relevant discussions.
TWT also enhances coordination among TMT members, which is a significant predictor of team performance (Okhuysen
and Bechky, 2009). TWT enhances both the effective division of labor among TMT members (Liang et al., 1995) and a team's
ability to coordinate roles and responsibilities (Reagans et al., 2005) by shaping a team's collective understanding of “who
knows what”, and thus the degree to which team members benefit from other members' accumulated knowledge and in-
formation (Wegner et al., 1991). When team members know more about one another, they can assign tasks to those who will
perform them best (Moreland et al., 2010). These coordination mechanisms are also evident in PE firms, where performance
depends on high levels of interdependence and resource sharing among TMT members (Gjolberg & Nordhaug, 1996).
Whereas TWT should generally benefit performance due to increased effectiveness and coordination, the relationship
between TWT and performance may not be universally positive and monotonic in the context of complex decisions. In this
context, TWT may not only translate more slowly into learning, but it may also generate superstitious learning, a situation in
which “experience accumulation might produce more confidence in the managers' own competence than actual compe-
tence” (Zollo, 2009: 894). Several studies have shown that decision making can be harmed by low levels of experience. When
decisions are complex, decision makers with some degree of experience are more likely to be overconfident, thus reducing
the quality of their assessments and decisions and undermining the assignment of roles and resources within the team
(Frascara, 1999; Glaser et al., 2007; Heath and Tversky, 1991; Kirchler and Maciejovsky, 2002; Menkhoff et al., 2006).
Moreover, coordination among decision makers working together creates a cognitive load that saturates the limited capacity
of decision makers (Laamanen et al.,2017 in press). Whereas decision makers can learn to use their limited cognitive capacity
more effectively, it takes experience and time for this outcome to emerge (Castellaneta and Zollo, 2015). Therefore, the su-
perstitious learning and cognitive-load effects that surface in complex decisions may swamp the positive role of learning,
which results from increased effectiveness and coordination, and cause the relationship between TWT and performance to
take on a negative slope until sufficient levels of joint experience are accumulated.
In sum, the literature suggests that teams must balance the (decreasing) costs of TWT, such as superstitious learning and
cognitive overload, against the (increasing) benefits of TWT, in the form of improved coordination and effectiveness. Together,
these two predictions suggest that the least advantageous combinations of TWT costs and benefits will predominate at in-
termediate levels of TWT, such that the combined effects will result in a U-shaped relationship between TWT and perfor-
mance (Haans et al., 2015).
These mechanisms are evident in PE firms. Consider, for example, the case of a recently created PE firm. In a PE firm's
acquisition sequence, “the first acquisition perform at what can be considered a baseline level” (Haleblian and Finkelstein,
1999: 39). As PE firm executives start working together, the performance of subsequent buyouts may drop, rather than
improve, because of superstitious learning and the heavier cognitive load. At this stage, despite sharing joint responsibility for
buyout decisions, TME members suffer from limited skills in coordination and cooperation. Complexity and uncertainty have
increased, but an effective joint approach to communicating, sharing lessons learned, and coordinating roles and re-
sponsibilities has not yet emerged. Thus, performance will likely decrease.
As time working together accumulates, communication channels will form among TMT members. Lateral relational
mechanismsdincluding direct contacts between individuals, liaison roles, task forces, and teams (Egelhoff, 1991)dwill
gradually emerge, allowing TMT members to more effectively coordinate their work and become more effective in new
decision-making processes. As a result, the positive effects of TWT should grow larger than its negative effects, allowing TWT
to gradually exert an increasingly positive effect on buyout performance. For these reasons, we expect the relationship be-
tween TWT and buyout performance to be U-shaped.
Hypothesis 1. The relationship between buyout performance and the time spent working together (TWT) by members of the
investment committee will be U-shaped.
It should be noted that, as in all cases where both positive and negative effects are at play, the precise shape of the
relationship will be fundamentally an empirical issue (see Haans et al., 2016 for a review). Some arguments point to the
alternative of an inverted U-shaped relationship. One could assume that TMT performance improves with the time spent
working together and then, later on, may potentially decrease because of the negative effect of groupthink or conflict
(Barkema and Shvyrkov, 2007).1 In our context of PE firms, we expect that the positive effects of coordination take time to
emerge due to the complexity of buyout investments. However, because buyout decisions require the systematic and rigorous
application of tried-and-true decision-making logics, rather than the continuous development of innovative approaches
(Kaplan and Stromberg, 2009), we do not expect the gradual emergence of the negative groupthink effects that afflict teams
involved in decision-making processes requiring significant levels of creativity (Harvey, 2014). Thus, a priori, we expect a U-
shaped relationship between TWT and performance in PE firms.
Investment committee functional heterogeneity
Researchers have long been interested in the effects of TMT heterogeneity on firm performance. The original insight
(Hambrick and Mason, 1984) was that heterogeneity is positive because executives with diverse experience and tenures bring
varied frames of reference to a TMT's deliberations. This richness of perspective will be especially valuable in dynamic en-
vironments that call for ongoing innovation and change (Hambrick et al., 1996; Nielsen, 2009). This positive view of het-
erogeneity is premised on the idea that a greater variety of experiences endows TMTs with multiple cognitive perspectives
(Hambrick and Mason, 1984), increased information accessed through diverse networks (Williams and O'Reilly, 1998), and
healthy dissent and reduced groupthink (Amason, 1996).
In line with these insights, common wisdom in the PE industry has suggested that heterogeneity is positively and
significantly associated with firm performance because it improves the quality of strategic decisions. Describing PE firms,
Gordon (2006: 12) argues that “heterogeneity is critical to [a TMT's] overall effectiveness [and] members should be aware of
the expertise that each of them brings to discussion.” Many PE executives contend that “the partners' experience in markets,
management, technology, and business models has to be much more distinct than as in buyout firms” (Alf Grunwald and
Warburg Pincus, quoted in Willert and Kniphausen-Aufsess, 2008: 38).
Whereas a significant stream of literature has looked at the direct impact of heterogeneity on performance, we believe that
TMT heterogeneity activates additional mechanisms that indirectly and negatively influence performance. TMT heterogeneity
may delay the emergence of coordination and effectiveness from TWT in three ways.
First, according to work on diversity in organizations, individuals who are different in background may not share common
life experiences and values, and may find the experience of interacting with another more difficult, negatively reinforcing, and
less desirable (Williams and O'Reilly, 1998). Following this rationale, heterogeneity among members of a team would
1
We gratefully acknowledge a reviewer's suggestion to introduce this argument.
negatively affect the willingness to cooperate (Amason, 1996; Pelled et al., 1999) and to share information (Carpenter, 2002;
Hambrick et al., 1996). This may hamper informal communicationdthe spontaneous conversations and unstructured meet-
ings that smooth “the ease and frequent flow of communication among team members” (Smith et al., 1994: 418). Reduced
cooperation and information sharing should further obstruct the emergence of the positive effect of TWT on firm performance.
Second, TMT heterogeneity is associated with team members' subconscious tendency to sort each other into social cat-
egories, attributing more value to members with a similar experience and profile and less value to members with different
experience and profile (Williams and O'Reilly, 1998). Categorizing team members in this manner could increase problems of
superstitions learning at low levels of TWT. These categorizations are further harmful because negative stereotypes are
resented by other groups, and may lead to interpersonal conflicts between group members. Interpersonal (Knight et al., 1999),
emotional (Pelled et al., 1999) and affective (Amason, 1996) conflicts are dysfunctional because they delay the emergence of
coordination and effectiveness that is produced as TWT accumulates.
Third, heterogeneity and the increased potential for interpersonal conflict may adversely impact the relationship between
TWT and firm performance by hampering a primary driver of team performance: social integration (Certo et al., 2006; Smith
et al., 1994). Negative stereotypes and related conflicts adversely affect social integration, which is defined as “the attraction to
the group, satisfaction with other members of the group, and social interaction among the group members” (O'Reilly et al.,
1989: 22). Lacking social integration, TMT members will be less likely to cooperate, and in turn will participate in fewer of
the self-reinforcing interpersonal interactions that are conducive to the development of effective decision making.
Together, this line of research suggests that heterogeneity will exert a negative moderating influence on the TWT-
performance link. Thus, we propose that as TMT heterogeneity increases, the improvement in coordination among TMT
members will be less steep (or may even turn negative).2
Hypothesis 2. As TMT heterogeneity increases, the negative effects of TWT on performance will become more negative, and
the positive effect will become less positive (or even turn negative).
The investment committee and its investment team
The context in which TMTs operate affects their functioning. Specifically, the individuals who work most closely with TMT
members have a strong influence on the effectiveness of their joint work (Wooldridge et al., 2008). This influence is
particularly salient in the context of PE firms, which tend to employ a fairly flat organizational structure with only a few
hierarchical layers. In PE firms, this group of collaborators is represented by the investment teamde.g., analysts, senior
managers, and associatesdcomposed of non-partner professionals who have significant interactions with members of the
investment committee. Therefore, we investigate how the size of the investment team that supports a PE firm's TMT in-
fluences the relationship between TWT and performance.
In PE firms, TMTs rely on non-partner professionals who are experts on financial, accounting, legal, and administrative
issues. The investment team collects most of the informationddue diligence, reporting, and researchdthat the TMT needs to
make decisions related to each buyout, both from external sources and from previous deals performed by TMT members. It
also helps implement the TMT's decisions, such as negotiating the investment terms and structuring the legal and financial
aspects of the deal, by helping TMT members draw on the pool of their previous experience with solutions that worked or that
failed to work. In PE firms, TMT members work closely with the investment team due to the high level of specialization and
tacitness of the knowledge accumulated in the experience of performing a sequence of buyouts. This accumulated knowledge
is often transferred from experienced TMT members to less experienced professionals, or acquired by investment team
members through their own accumulated experience. In turn, investment team members codify such knowledge, making it
available to TMT members of the investment committee performing subsequent deals.
The investment team increases the quality of TMTs' decision making in three ways. First, the investment team facilitates
the exchange of information among decision makers, thus increasing the quality and quantity of the information that team
members share. The quality of strategic decisions made by TMT members is influenced by the amount and type of information
the TMT gathers, exchanges, interprets, and synthesizes (Raes et al., 2011), so the TMT must incorporate as much relevant
information as it can and analyze this information appropriately (Bottazzi et al., 2008). The information that an investment
team gathers and analyzes is likely to complement the TMT's efforts (Wooldridge et al., 2008) because the investment team
has direct access to the pool of knowledge developed by TMT members in the past, and uses different tools to analyze and to
match it with the requirements of the task at hand (Currie and Procter, 2005; Dutton and Ashford, 1993). The investment team
increases knowledge codification (Zollo and Winter 2002) and reflective communication (Gibson and Vermeulen, 2003), and
produces reports that identify what knowledge each team member contributed and how that information may affect de-
cisions in the current deal. Such information helps TMTs understand who knows what (Reagans et al., 2005) and to effectively
leverage this knowledge. In the PE context, the information provided by the investment team is relevant to the investment
committee because PE firm partners have little time to collect and analyze the data that are needed to screen, evaluate, and
negotiate buyout deals, due to activity overload (Castellaneta and Zollo, 2015).
2
A moderator weakening the curvilinearity of a relationship will result in the flattening of the U-shaped relationship, and may even flip the curve's shape
(from U-shaped to inverted U-shaped) (Haans et al., 2016).
Second, as the team literature shows, people supporting the TMT may contribute information and perform activities
that directly increase the effectiveness of a group's decisions. For instance, Faraj and Xiao (2006) illustrated nurses' crucial
supporting role in doctors' decision-making. People supporting the TMT may suggest alternative solutions to a problem
drawn from the TMT's past experience, thus allowing decision makers to choose solutions from a broader set of possible
alternatives and thereby improve the average quality of the decisions they make (Raes et al., 2011).
Third, in the PE context, TMTs' delegation of activities to the investment team increases the attention available for
decisions with a higher marginal impact on buyout performance (Ocasio, 1997). For instance, in one PE firm we observed
that the investment team facilitated TMT members' work in three different areas. First, a research group was comprised of
industry experts who provided TMT members with valuable knowledge and insights to facilitate sourcing and evaluating
investment opportunities in each target market. Second, once the deal was negotiated and closed, a portfolio development
group supported TMT members' efforts to accelerate the growth of portfolio companies by reporting best practices and
lessons learned from previous deals. Third, an operations group provided services that embodied codified knowledge from
past experiences, such as financial reporting, information systems, and organizational planning for portfolio companies. By
operating in these three areas, we can expect that investment teams facilitate the codification of knowledge accumulated
as TMT members work together over time. They also enhance the transfer of that knowledge, which increases the likeli-
hood of its correct application to subsequent strategic tasks.
This logic suggests that the increase in superstitious learning should be less steep in investment committees assisted by a
larger investment team. When TMTs are backed by a larger investment team, the lowest-level buyout performance in relation
to TWT (the turning-point) will shift to occur earlier. We thus predict that access to support from a larger investment team
positively moderates the performance impact of TWT on buyout performance:
Hypothesis 3. As the investment team increases in size, the negative effect of TWT on performance will become less negative
(or even positive), and the positive effect will become even more positive.
Research design and measures
Sample and database
We used data from a sample of 185 investments by 17 European PE firms. The first investment in our dataset occurred in
1989. We tracked the professional backgrounds and activity of all 128 executives in these firms and the amount of time that
each pair of executives spent working together (TWT) on joint investment decisions. The last investment to be divested in our
dataset was sold in 2008. We assembled the data by collecting fundraising prospectuses, usually referred to as private
placement memoranda (or PPM), produced in 2007 and 2008. We collected data about the individual experience of TMT
members from their curriculum vitae (CVs), which contained detailed information about each partner's individual track re-
cord, including all investments they executed prior to the focal decision. The number of PE firms and investment decisions
that we investigated, the time span, and the level of detail on TMT members' joint experience and investment team size make
the extent of our study unusual in the literature on PE firms and TMTs.
Measures
Dependent variable
We measured the outcome of TMT decisions in PE firms with the financial performance of the focal buyout decisions,
captured by the Internal Rate of Return (IRR) of each buyout (Kaplan and Schoar, 2005). Numerous studies have used
performance data at the firm level to measure the outcome of TMT decisions. Barrick, Bradley, Kristof-Brown, and Colbert
(2007), for instance, found that communication and cohesion within TMTs in credit unions positively affected firm-level
financial ratios. Barsade et al. (2000) reported a positive relationship between functional heterogeneity and firm stock
market returns. Smith et al. (1994) and Carpenter (2002) found that demographic heterogeneity had directly and indirectly
affected firm performance. In particular, educational heterogeneity was positively associated with return on investment and
sales growth.
Tracing a direct link between TMT characteristics and firm-level performance outcomes is particularly plausible in PE
firms. First, each buyout is performed and managed independently by the PE firm, making it possible to objectively and
separately measure the performance of each investment (Landau and Bock, 2013). Second, both the decision to acquire a
target company and the subsequent value-addition phase can be traced to the specific set of executives that composed the
TMT at the time of the focal investment.
We calculated the IRR as an annualized compounded rate of return using monthly cash flows and annual valuations for
each company. Because our data included significant outliers, we Winsorized performance (IRR) at the 95th percentile (i.e.,
2.15 which equals 215%) (Hamilton, 2009; Phalippou and Gottschalg, 2009). As shown in the results section, different
specifications (i.e., 96th, 97th, 98th and 99th percentile) of the Winsorization level do not change our results.
Explanatory variables
We computed Time Working Together (TWT) for each pair of executives on the TMT of firms in our sample. The variable
measures the average value of time (expressed in years) that any two partners spent working together in the TMT of the PE
firm. Our dataset only rarely reports the month or day in which a partner joined the PE firm, making the construction of a
more fine-grained measure (e.g., expressed in months or days spent working together) unfeasible. However, given the length
of these projects, which usually span several months of TMT work, we do not think that a more fine-grained measure would
alter our results.
The TWT measure is built following Carroll and Harrison (1998) and Barkema and Shvyrkov (2007). This measuredfirst
proposed by Carroll and Harrison (1998)dcaptures “the overlap in tenure of team members” Barkema and Shvyrkov (2007:
671), and is thus a good representation of time spent working together. It is calculated in two steps. First, we calculated the
sum of all common experiences by extracting the time that each combination of two partners overlapped on the TMT of each
PE firm. We then divided this sum by the number of overlaps:
1 X
Time Working Together ¼ min ui ; uj
N isj
where N is the total number of pairwise comparisons, and i and j indicate two TMT members. Our data allowed us to compute
this measure because they made it possible to identify the members of the TMT who were collectively responsible for each
single buyout at each point in time. We could thus trace a direct link between the TMT that executed an investment and the
performance of that investment.
Team heterogeneity measures the knowledge overlaps between the partners of the investment committee. We constructed
this measure following the procedure proposed by Reagans and McEvily (2003):
P
n
aik ajk
eoij ¼ 1 k¼1
Ni
where aik equals 1 if the person i has a professional background in area k, and ajk equals 1 if person j is an expert in area k
(Reagans and McEvily, 2003). The product of these two variables equals 1 when both individuals have a professional back-
ground in the specific area k. We summed the product across the two key areas of expertise of TMT members, management
and finance, and divided it by the number of areas. We then subtracted this sum from 1. Overall, knowledge overlap ranged
from 0 to 1, with higher values indicating more heterogeneity (i.e., less overlap).
We obtained the background of TMT members by coding the individual partners' CVs. More specifically, a partner is
considered to have management experience if s/he was involved in management activities (e.g., chief executive officer, chief
operating office, management consultant, strategy consultant, entrepreneur, founder of a start-up, executive in the public sector
with a non-profit organization). A partner is considered to have finance experience if s/he was involved in financial activities (e.g.,
chief financial officer, mergers & acquisition boutique, investment bank, accounting, banking, private banking, and auditing).
Investment Team Size measures the number of non-partner professionals available to the investment committee. Although
investment team members are not part of the TMT in PE firms, and therefore have no direct influence on the TMTs final
decisions, they prepare documents and analyses that support the TMT's decision process. We calculated this variable by
counting the number of investment team members at the entry year of each focal investment.
Control variables
Factors beyond the three independent variables might affect an investment's performance. A first set of controls accounts
for various characteristics of the focal buyout. Buyout performance can be influenced by the duration of the focal invest-
mentdthe Holding Perioddand the enterprise value of the acquired companydthe Transaction Sizedand the Number of Co-
investors in the company.
A second set of variables controls for characteristics of the lead investment professional (or lead partner) within the TMT.
The model includes partner age because previous studies on age and task performance have indicated a negative relationship
(Birren et al., 2006) and the average number of years a partner has spent on the team (i.e., Seniority). A partner's education
may also be linked to higher returns (Hitt et al., 2001).
A third set of covariates attempts to separate the effect of TWT at the TMT level from other upper-echelon effects. To this
end, we controlled for the stock of TMT members' accumulated experience. Following Carroll and Harrison (1998) and
Barkema and Shvyrkov (2007), we also controlled for the TMT's Experience Working Together (EWT). Similar to the process
followed for Time Working Together, for each pair of individuals on the team when the focal investment occurred, we
calculated the number of times the pair bought and sold a company. We summed across pairs on the team and divided by the
possible number of pairs. We also controlled for the average age of team members (i.e., team seniority) that may be correlated
with TMT heterogeneity. PE firms' executives with more seniority are more likely to have both a financial and a managerial
background. In addition, the variable Number of Countriesdwhich is likely correlated with investment team sizedcontrols for
the number of countries in which the TMT pursued potential investment opportunities.
Results
We use a random-effects least squares model, given that the Hausman specification test confirms that the random-effects
model is better than a fixed-effects model (Greene, 2003).3
Tables 1 and 2 reports descriptive statistics and a correlation matrix for the variables we used. Interestingly, the correlation
between Time Working Together and Experience Working Together is only 0.2, suggesting that they represent two different
constructs.
Table 1
Descriptive statistics.
Count Mean SD Min Max

1. IRR (95th)a 185 0.53 0.65 1.00 2.15
2. Time working together 185 4.47 3.01 0.00 13.00
3. Team heterogeneity 185 0.24 0.18 0.00 1.00
4. Investment team size 185 27.69 30.93 3.00 109.00
5. Experience working together 185 3.25 6.40 0.00 26.00
6. Average age (years) 185 39.49 4.69 29.00 51.50
7. Number of countries 185 1.70 1.46 1.00 6.00
8. Holding period (years) 185 3.55 1.73 0.75 9.01
9. Transaction size (000) 185 170,739.66 354,864.53 159.68 2,560,364.46
10. Number of co-investors 185 1.01 1.35 0.00 4.00
11. Seniority (years) 185 5.37 3.43 0.00 18.00
12. Age (years) 185 39.46 6.67 27.00 56.00
13. IRR (96th)a 185 0.56 0.74 1.00 2.83
14. IRR (97th)a 185 0.57 0.76 1.00 3.10
15. IRR (98th)a 185 0.59 0.84 1.00 4.04
16. IRR (99th)a 185 0.62 0.98 1.00 6.36
a
The value in parenthesis indicates whether the IRR has been censorized at the 95th, 96th, 97th, 98th, or 99th percentile.
Table 2
Correlation matrix.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

1. IRR (95th) 1.0
2. Time working together 0.1 1.0
3. Team heterogeneity 0.1 0.2* 1.0
4. Investment team size 0.1 0.0 0.3*** 1.0
5. Experience working together 0.2** 0.2** 0.2** 0.2** 1.0
6. Average age 0.0 0.6*** 0.1 0.2** 0.0 1.0
7. Number of countries 0.0 0.1 0.3*** 0.9*** 0.2** 0.2*** 1.0
8. Holding period 0.5*** 0.1 0.1 0.0 0.1 0.0 0.0 1.0
9. Transaction size 0.0 0.3*** 0.0 0.4*** 0.1 0.2** 0.4*** 0.1 1.0
10. Number of co-investors 0.1 0.1 0.1 0.3*** 0.2* 0.1 0.3*** 0.1 0.0 1.0
11. Seniority 0.0 0.2*** 0.1 0.1 0.2* 0.1 0.2** 0.2** 0.1 0.2** 1.0
12. Age 0.1 0.0 0.3*** 0.1 0.0 0.4*** 0.1* 0.3*** 0.2* 0.0 0.4*** 1.0
13. IRR (96th) 1.0*** 0.1 0.0 0.0 0.2** 0.0 0.0 0.5*** 0.0 0.1 0.0 0.1 1.0
14. IRR (97th) 1.0*** 0.1 0.0 0.0 0.2** 0.0 0.0 0.5*** 0.0 0.1 0.0 0.1 1.0*** 1.0
15. IRR (98th) 1.0*** 0.1 0.0 0.1 0.2* 0.1 0.1 0.4*** 0.0 0.1 0.0 0.1 1.0*** 1.0*** 1.0
16. IRR (99th) 0.9*** 0.0 0.0 0.1 0.2* 0.1 0.1 0.4*** 0.0 0.1 0.0 0.1* 0.9*** 0.9*** 1.0*** 1.0
***p < 0.001, **p < 0.01, *p < 0.05.
Hypothesis 1. Table 3 and Table 4 report the estimates for buyout performancedIRR. Model 4 in Table 4 shows that the
coefficient of the linear term of TWT is significantly negative and that the coefficient of the squared term of TWT is signif-
icantly positive. This suggests a U-shaped relationship between TWT and performance. However, in order to conclude that
there is a U-shaped relationship, it is not sufficient to have the quadratic term significant and the estimated extreme point
within the data range (Lind and Mehlum, 2010). This criterion is too weak when the true relationship is convex but monotonic
over relevant data values. To validate the presence of a U-shape, three conditions must be met: (1) the coefficient of the
squared term needs to be significant and of the expected sign; (2) the slope must be sufficiently steep at both ends of the data
range; (3) the turning point needs to be located well within the data range. To test these conditions, we used the Lind and
Mehlum (2010) model and the utest command in STATA 14. All the three conditions are met, suggesting that there is a U-
shape relationship between TWT and performance. This supports Hypothesis 1.
3
In particular, the Hausman test checks if the null hypothesis (i.e., errors are not correlated with the regressors) is rejected. If the null hypothesis is not
rejected (as in our case), the preferred model is a random-effects model (as opposed to a fixed-effects model).
Table 3
Time working together on IRR.
Variables (1) (2) (3) (4) (5)
IRR (95th) IRR (95th) IRR (95th) IRR (95th) IRR (95th)
Time working together HP1 0.032 (0.027) 0.145* (0.059) 0.171** (0.065) 0.171** (0.056)
Time working together^2 HP1 0.010* (0.005) 0.011* (0.005) 0.011* (0.005)
Team heterogeneity 0.438 (0.394) 0.412 (0.294)
Investment team size 0.002 (0.003)
Team characteristics
Experience working together 0.022* (0.009) 0.018 (0.010) 0.014 (0.010) 0.012 (0.011) 0.014 (0.008)
Average age 0.011 (0.015) 0.023 (0.019) 0.025 (0.019) 0.032 (0.022) 0.038** (0.014)
Number of countries 0.028 (0.051) 0.029 (0.053) 0.021 (0.053) 0.026 (0.058) 0.027 (0.069)
Buyout characteristics
Holding period 0.176*** (0.027) 0.171*** (0.028) 0.165*** (0.028) 0.161*** (0.028) 0.171*** (0.026)
Transaction size 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000)
Number of co-investors 0.008 (0.041) 0.012 (0.042) 0.001 (0.042) 0.003 (0.042) 0.007 (0.039)
Lead partner characteristics
Seniority 0.002 (0.017) 0.002 (0.017) 0.006 (0.017) 0.005 (0.018) 0.008 (0.016)
Age 0.009 (0.008) 0.011 (0.009) 0.010 (0.009) 0.010 (0.009) 0.008 (0.008)
Constant 1.219* (0.597) 0.928 (0.681) 0.973 (0.673) 0.608 (0.829) 0.389 (0.530)
Observations 185 185 185 185 185
R-squared 51.583 52.580 58.266 58.361 75.182
Standard errors in parentheses.

***p < 0.001, **p < 0.01, *p < 0.05.
Table 4
Time working together, team heterogeneity and investment team size on IRR.
Variables (1) (2) (3) (4)
IRR (95th) IRR (95th) IRR (95th) IRR (95th)

Time working together HP1 0.165** (0.060) 0.245* (0.096) 0.330** (0.104) 0.358*** (0.104)
Time working together^2 HP1 0.012* (0.005) 0.021* (0.010) 0.029** (0.011) 0.036** (0.011)
Team heterogeneity 0.599 (0.670) 0.070 (0.918) 0.089 (0.913) 0.624 (0.975)
Investment team size 0.002 (0.003) 0.001 (0.003) 0.010 (0.006) 0.000 (0.008)
TWT* team heterogeneity HP2 0.039 (0.127) 0.318 (0.359) 0.429 (0.359) 0.941* (0.441)
TWT^2* team heterogeneity HP2 0.039 (0.037) 0.062 (0.038) 0.126* (0.050)
TWT* investment team size HP3 0.001* (0.001) 0.004 (0.003)
TWT^2* investment team size HP3 0.001* (0.000)
Experience working together 0.014 (0.008) 0.015 (0.008) 0.012 (0.008) 0.013 (0.008)
Average age 0.037* (0.014) 0.037* (0.014) 0.039** (0.014) 0.039** (0.014)
Number of countries 0.030 (0.070) 0.042 (0.071) 0.012 (0.074) 0.035 (0.075)
Holding period 0.172*** (0.026) 0.174*** (0.026) 0.167*** (0.026) 0.163*** (0.026)
Transaction size 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000)
Number of co-investors 0.008 (0.039) 0.008 (0.039) 0.008 (0.039) 0.014 (0.039)
Seniority 0.009 (0.016) 0.008 (0.016) 0.004 (0.016) 0.005 (0.016)
Age 0.008 (0.009) 0.009 (0.009) 0.007 (0.009) 0.006 (0.008)
Constant 0.399 (0.533) 0.556 (0.553) 0.521 (0.548) 0.375 (0.548)
Observations 185 185 185 185
R-squared 74.883 76.077 81.791 87.072

***p < 0.001, **p < 0.01, *p < 0.05.
Turning to the moderation effect predicted in Hypothesis 2 and 3, the moderators need to be interacted with both the
linear and the squared terms of the independent variabledTWT in our specific casedbecause the direct effect is non-linear.
The moderation effect depends on different factors: a change in the location of the minimum; a change in the shape of the U-
form curve (Haans et al., 2016). Overall, the interpretation of the moderation effect can be correctly done by plotting the
interaction over the range of the independent variables.
Hypothesis 2. Model 4 in Table 4 shows that while the interaction between the term Team Heterogeneity and the linear
term of TWT is not significant, the interaction between Team Heterogeneity and the squared term of TWT is negative and
significant. Fig. 1 shows that whereas the impact of TWT first decreases and then increases at the mean value of team het-
erogeneity, the impact of TWT is always negative at plus one standard deviation of team heterogeneity, suggesting a shape-
flipping effect (Haans et al., 2015). This suggests that team heterogeneity negatively moderates the impact of TWT on buyout
performance. Together, these results support Hypothesis 2.
Fig. 1. Interaction between time working together and team heterogeneity.
Hypothesis 3. Model 4 in Table 4 shows that while the interaction between the linear term of TWT and the size of the
investment team is positive and significant, the interaction term between the squared term of TWT and Investment Team Size is
insignificant. Fig. 2 shows that, at plus one standard deviation of Investment Team Size, the time it takes to reach the minimum
IRR decreases from around 7 years to around 6 years. This implies that the turning point of the curve shifts to the left.
Moreover, the relationship between TWT and performance becomes more positive at high values of TWT; that is, when TWT is
greater than 7. This suggests that Investment Team Size positively moderates the impact of TWT on buyout performance.
Together, these results support Hypothesis 3.
Fig. 2. Interaction between time working together and team support.
Robustness checks
Alternative measures of IRR
First, we checked whether our results were robust to different specifications of the Winsorization level (95th percentile)
applied. We used different Winsorization cutoff pointsd96th, 97th, 98th, 99th percentile. Our results (Models 1, 2, 3, and 4 in
Table 5) did not change.
Different model specification
Our sample includes TMTs that are nested inside the organization, suggesting that a hierarchical linear model could be
used as an alternative model. Therefore, we re-ran our model using a hierarchical linear model (HLM) (Model 5 in Table 5).
Results were similar to those with a random-effects least squares model.
Table 5
Robustness checks.
Variables (1) (2) (3) (4) (5)
IRR (96th) IRR (97th) IRR (98th) IRR (99th) IRR (95th)
Time working together HP1 0.377** (0.119) 0.376** (0.124) 0.370** (0.138) 0.383* (0.165) 0.358*** (0.099)
Time working together^2 HP1 0.040** (0.013) 0.040** (0.013) 0.042** (0.015) 0.050** (0.018) 0.036*** (0.011)
Team heterogeneity 0.975 (1.119) 1.042 (1.163) 1.166 (1.297) 1.253 (1.549) 0.624 (0.929)
Investment team size 0.003 (0.009) 0.003 (0.009) 0.007 (0.010) 0.017 (0.012) 0.000 (0.007)
TWT* team heterogeneity HP2 1.113* (0.506) 1.134* (0.526) 1.224* (0.586) 1.495* (0.701) 0.941* (0.420)
TWT^2* team heterogeneity HP2 0.146* (0.057) 0.148* (0.059) 0.162* (0.066) 0.209** (0.079) 0.126** (0.047)
TWT* investment team size HP3 0.005 (0.003) 0.005 (0.003) 0.007 (0.004) 0.010* (0.005) 0.004 (0.003)
TWT^2* investment team size HP3 0.001* (0.000) 0.001* (0.000) 0.001* (0.000) 0.001* (0.000) 0.001* (0.000)
Experience working together 0.016 (0.009) 0.016 (0.010) 0.018 (0.011) 0.022 (0.013) 0.013 (0.008)
Average age 0.038* (0.016) 0.038* (0.017) 0.037 (0.019) 0.037 (0.023) 0.039** (0.014)
Number of countries 0.017 (0.086) 0.016 (0.089) 0.007 (0.099) 0.032 (0.119) 0.035 (0.071)
Holding period 0.178*** (0.030) 0.183*** (0.031) 0.195*** (0.035) 0.214*** (0.042) 0.163*** (0.025)
Transaction size 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000) 0.000 (0.000)
Number of co-investors 0.000 (0.045) 0.002 (0.046) 0.006 (0.052) 0.014 (0.062) 0.014 (0.037)
Seniority 0.007 (0.018) 0.007 (0.019) 0.008 (0.021) 0.015 (0.025) 0.005 (0.015)
Age 0.003 (0.010) 0.002 (0.010) 0.000 (0.011) 0.001 (0.013) 0.006 (0.008)
Constant 0.431 (0.629) 0.429 (0.654) 0.416 (0.729) 0.363 (0.871) 0.375 (0.522)
Observations 185 185 185 185 185
R-squared 77.225 74.407 67.162 58.553 95.883

***p < 0.001, **p < 0.01, *p < 0.05.
Controlling for tenure and age dissimilarity
Following the intuition provided in the paper by Reagans and McEvily (2003), and based on our data availability, we
constructed two measures that capture the social similarity of the partners: tenure and age dissimilarity. Following Reagans
and McEvily (2003), we constructed tenure dissimilarity by taking the difference in tenure between the partners composing
each dyad:

Tenure dissimilarity ¼ tenurei tenurej
Similarly, we constructed age dissimilarity by taking the difference in age between the partners composing each dyad:

Age dissimilarity ¼ agei agej
We ran a robustness check (results available upon request) where we included these two measures as controls. Results
were robust to the inclusion of these two control variables.
Time working together (since joining the PE firm)
Our measure of time working together captures the time spent working together by the partners on the investment
committee. However, the partners of PE firms are sometimes promoted to this position from within the firm. They may thus
have a longer history of working together as middle managers (though never as support staff) with other partners of the
investment committee. To this end, we computed a measure of time working together that takes into account the year in
which the individual joined the PE firm, rather than the year in which s/he joined the investment committee as a partner. This
measuredTime Working Together in the PE firmdcaptures the time spent working together since each partner joined the PE
firm, rather than since the year each partner joined the investment committee. We reran our analyses using this alternative
measure (results available upon request) and found that neither the direct effect nor the interaction effects were significant.
This finding suggests that what really matters is the time spent working together in the investment committee, rather than
the time spent working together in the PE firm.
Time working together (lead partner)
Our measure of time working together captures the time spent working together by all the partners on the investment
committee. However, it is possible that what really matters is the time a lead partner spends working together with the other
partners. To this end, we developed a measuredTime Working Together (lead partner)dthat measures only the time that the
lead partner spent working together with the other partners in the investment committee. We ran a robustness check using
this alternative measure of TWT and found that neither the direct effect nor the interaction effects were significant (results
available upon request). This suggests that what really matters is the time all partners spent working together in the in-
vestment committee.
TMT size
The variable TMT size is not used as a control in all specifications, given that its inclusion leads to problems of multi-
collinearity and could therefore bias the estimated coefficient of TWT and its moderations (Wooldridge et al., 2008). However,
based on previous studies (Barkema and Shvyrkov, 2007), we ran a robustness check where we controlled for TMT size, which
in our specific context is the number of partners composing the investment committee. Our results (available upon request)
did not change by including this control in the model.
Fund size and PE firm age
Our main variabledTime Working Together (TWT)dis likely to be correlated with the variables PE Firm Age and Fund Size.
Indeed, younger and smaller PE firms could have a lower status in the industry and could have access to lower quality deals.
Therefore, if PE firm age and size are not included in the controls, the initial negative relationship between TWT and per-
formance may not arise from time working together per se, but rather from the status of the PE firm in the industry. To rule
out this alternative explanation, we ran a robustness check including as controls PE firm age and fund size (measured as the
equity raised by the fund that acquired the focal company (Castellaneta and Zollo, 2015). Results (available upon requests) did
not change.
Time and experience working together
An interesting extension of our argument is that time working togetherda proxy for the number of potential investments
evaluateddand experience working togetherdthe number of investments bought and solddmight affect one another. Re-
sults (available upon request) show that the interaction terms between the linear and the squared terms of Time Working
Together and Experience Working Together were not significant. These findings show that experience working together does
not moderate the relationship between time working together and performance.
TMT tenure diversity and TMT average tenure
Alternative measures such as (a) TMT tenure diversity and (b) TMT average tenure could also be used as proxies for time
spent working together. However, we think they are less appropriate in our case than our current measure. The TMT tenure
diversity measure (e.g., Nadolska and Barkema, 2014)d computed as the coefficient of variation of executives' respective
tenures on the TMTdis a proxy of tenure heterogeneity rather than time spent working together, because it captures the
extent to which some TMT members may have spent significantly greater time in the TMT than others. TMT average tenure
(e.g., Carpenter, 2002) is computed as the median of the executives' respective tenures on TMT. Therefore, it captures only
indirectly the time that each pair of TMT members spent working together. The measure of TWT that we adopt in this study
more directly captures our focal theoretical construct, and is thus more consistent with our theoretical arguments. In sum,
given the nature of our theoretical construct and our specific context, the measure developed by Carroll and Harrison (1998)
and then applied by Barkema and Shvyrkov (2007), among others, is the one that is best suited to our specific research
purposes.
In addition, we ran two additional robustness analyses. First, we checked whether our results were robust to the inclusion
of TMT tenure diversity and TMT average tenure as control variables. Our results (available upon request) were robust to the
inclusion of these two controls. Moreover, we re-ran our analyses using TMT tenure diversity and TMT average tenure as main
independent variables, instead of our variable Time Working Together. Results (available upon request) show that, unlike Time
Working Together, TMT tenure diversity and TMT average tenure have no significant direct effect on performance. This sug-
gests that TMT tenure diversity and TMT average tenure are likely to capture a theoretical construct that is partially different
from the one captured by Time Working Together.
Discussion
This study explores various dimensions of the relationship between TMT experience and performance. By focusing on the
PE context, our results suggest that, besides the number of buyouts a PE TMT bought and sold, buyout performance is
influenced by the period of time that members of an investment committee spend working together. Our results suggest that
buyout performance is hampered when an investment committee has spent limited amounts of time working together,
referred to here as TWT. They further suggest that, over time, the gradual accumulation of interpersonal interactions and joint
work increases a committee's effectiveness and coordination, leading to better decision making and, in turn, enhanced buyout
performance.
Our findings also indicate that the relationship between TWT and buyout performance is affected by factors within the
investment committee and in the proximate organizational context. Functional heterogeneity in an investment committee
hampers this relationship by decreasing coordination, communication, and information exchange within the TMT, weakening
the quality of joint work and, thus, the positive impact of TWT on buyout performance. In contrast, the size of the team
assisting the investment committee, composed of non-partner professionals, enhances the effectiveness of investment
committee interactions, thus enhancing the positive impact of TWT on buyout performance.
In sum, our findings point to multiple interrelated factors that determine how the experience accumulated by TMT
members shapes TMT decision making and performance. TMT research has focused on fairly fluid teams, whose heteroge-
neous tasks are hard to trace to firm performance. Our study is noteworthy in its use of data on TMTs in PE firms. These TMTs
are highly stable, and the performance of each strategic initiative can be unambiguously traced to the team of executives who
selected and performed it.
This study offers important contributions to the TMT literature beyond the PE context, as well. We disentangle the impact
of the time and experience dimensions of working together. This contribution is important for what we call “culminating”
decisions eventsdthat is, settings in which major observable decisions happen rarely, but are the outcome of a prolonged
period of frequent, deliberate, and related decision-making activities. Culminating decision events differ from rare events in
the lifetime of the organization that are sudden and unexpectedde.g., the Challenger space shuttle explosion, the collapse of
ENRON, (Lampel et al., 2009), the collapse of the roof of the Baltimore and Ohio Museum Roundhouse (Christianson et al.,
2009), or fatal accidents in the average U.S. coal mine (Madsen, 2009).
When rare decision events are the culmination of an ongoing decision-making process, we submit that TMT learning can
be influenced by two different factors: the total number of culminating events that have taken placedwhat the literature
refers to as Experience Working Togetherdand the time that each pair of TMT members spends working together to arrive at
those eventsdconceptualized here as Time Working Together. Different from the number of culminating events, TWT proxies
for the number of activities performed in connection with the culminating events. In this respect, our findings show that the
impact of completed tasks is no longer significant when time working together is taken into account.
Another contribution emerging from our findings is that TWT does not have a monotonic effect on performance. Our
results show that, in the initial stages of working together, buyout performance declinesdan effect we credit to superstitious
learning and cognitive overload. As TWT accumulates above a certain threshold, however, its net effect on performance turns
positive. This is due, we argue, to the increasing effectiveness and coordination of joint work that results from the growing
familiarity among TMT members, which in turn improves information sharing and the ability to reach common in-
terpretations and decisions. The result is a non-monotonic (i.e., U-shaped) relationship between TWT and performance.
Besides the direct effect of TWT on performance, our study identifies two elements that influence its salience: the het-
erogeneity in TMT members' functional backgrounds and the size of the team that assists the top decision-makers. First, we
build on research about the influence of TMT heterogeneity on firm performance by showing that heterogeneity has a
negative moderating effect on strategic decisions. We show that TMT heterogeneity seems to inhibit coordination and
effective decision-making. Further, we show that TMTs do not act in an organizational vacuum. The team supporting the top
decision-makers may enhance the coordination of task execution and improve the ability of TMT members to assess strategic
information and make decisions. Our data confirm that the size of the team supporting the top decision-makers reduces the
time a TMT needs to overcome the early, negative impact of TWT. Interestingly, we found no direct effect of the size of the
team supporting top-decision makers on performance. This result suggests that, in strategic decision-making, the supporting
team alleviates negative biases in decision makers' learning processes (Faraj and Xiao, 2006), but does not directly improve
the content and quality of strategic decisions.
Our study also has practical implications for managers involved in strategic decision-making. In particular, our results
point to the potentially negative impact on performance of joint work among members of “young” TMTs who have had spent
limited time working together. To reduce the risk of poor decisions, managers should pay attention to both team composition
and to the number of people assisting the TMT. The heterogeneity of the decision-making group appears to negatively affect
the quality of a TMT's decisions indirectly. Our analysis suggests that firms should be aware of the consequences of more
heterogeneous teams on TMT coordination and effectiveness. Moreover, our findings show that having a larger team assisting
the TMT may increase the quality of decision making by reducing the likelihood that TMT members will erroneously assess
information related to their decisions. This result suggests that the size of the team assisting the TMT should be increased
beyond the immediate requirements of coordination and execution, within the boundaries of resource availability and work
efficiency. The reason is that, whereas this team does not have any direct impact on performance, it likely increases the
benefits derived from TWT in the TMT.
Some limitations of our study should be addressed by future research. First, we did not directly measure the different
effects on performance of factors related to TWT; for instance, we modeled the aggregate effect of effectiveness and coor-
dination but could not separate their individual impact on performance. Second, we measured the time spent working
together but did not directly measure the amount of knowledge that team members shared as a result. More micro studies
will be needed to ascertain the effects on decision performance of actual overlaps in information and knowledge among
decision makers. Further, future research will be required to better understand the micro-foundations of TMT work. Beyond
the team effects considered in this study, individual decision makers may vary considerably in how inclined they are to
cooperate, collaborate, and coordinate. For instance, we do not know if the decline in performance at low levels of TWT varies
with the accumulation of individual experience, or if other individual traits explain why team members vary in how well they
perform their individual and joint tasks within the team. In addition, as with previous studies, we did not observe the po-
tential buyout investments that the investment committee evaluated but ultimately chose not to pursue. Due to this problem,
our variable Experience Working Together does not capture the complete experiencedinvestment opportunities executed and
not executeddthat the investment committee accumulated. Future works should investigate whether it is possible to
replicate the same results for experience working together when taking all investment opportunities (evaluated and
executed) into account.
Third, our arguments assumed a relatively functional investment committee, in which decision were made jointly and
through time, and joint engagement in decision-making capability was being built. However, investment committees may
also be highly political places in which trading favors plays a greater role in driving decisions than learning. For instance, lead
PE partners may trade with their colleagues, letting them invest in certain deals, provided colleagues return the favor by not
blocking their own buyouts. In such investment committees, little learning takes place and political dynamics prevail. Future
work should thus investigate how political dynamics affect our findings.
Fourth, we used TWT as a proxy for the number of potential investments that an investment committee evaluated. This
proxy does not allow us to conclude whether the effect of TWT is driven by the time that the TMT members have spent
working together or by the number of investment candidates evaluated. Future work should try to disentangle these two
effects. Finally, the unique features of investment committees in PE firms make them particularly suitable to address the
direct link between TMT work and firm-level performance, but they also partially reduce the generalizability of our results to
other types of firms. PE firms often operate with a partnership structure that makes investment committees different from
the typical TMT in a business corporation; for instance, in terms of roles, average age, educational and professional back-
ground, and compensation. Moreover, the investment committee in a PE firm is relatively stable and thus likely to spend more
time working together than the TMT in other types of organizations.4 Future works could explicitly compare the link between
TWT and performance in contexts characterized by more or less direct relationships between TMT decisions and their
outcomes, and by TMTs characterized by different compositions and degrees of stability.
Conclusion
Upper echelons scholars posit that the joint experience of TMT members positively affects firm performance. Our study
built on this notion by examining linkages among the time that TMT members spent working together (TWT), the hetero-
geneity of the TMT, the size of the team assisting the TMT, and financial performance. The findings suggest that TWT does not
have a universally positive impact on performance. Low levels of TWT may negatively affect performance, but effects become
positive as TWT accumulates. Further, the findings suggest that this relationship is influenced by contingency factors both
internal and external to the TMT. Overall, these results help clarify the mechanisms that link time working together to
performance in the context of ongoing decision-making processes that only rarely result in decisions with measurable
outcomes.
Acknowledgements
We gratefully acknowledge the valuable feedback of Pino Audia, Ilidio Barreto, Rajesh Chandy, Raffaele Conti, Erwin
Danneels, Alfonso Gambardella, Oliver Gottschalg, Sarah Kaplan, Dan Levinthal, Robert Grant, Anita McGahan, Alessandro
Minichilli, Giovanni Valentini, Andrew King, Maurizio Zollo, and seminar participants at Bocconi University and CLSBE Lisbon.
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Castellaneta Salvato LRP 2018 - Culminating Events and Time Working Together

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Long Range Planning 51 (2018) 865e880

Contents lists available at ScienceDirect

Long Range Planning

Culminating events and time working together in top

The TMT in PE ﬁrms

Time working together within investment committees in PE ﬁrms

Investment committee functional heterogeneity

The investment committee and its investment team

Research design and measures

Sample and database

Count Mean SD Min Max

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

***p < 0.001, **p < 0.01, *p < 0.05.

Variables (1) (2) (3) (4) (5)

Standard errors in parentheses.

Variables (1) (2) (3) (4)

IRR (95th) IRR (95th) IRR (95th) IRR (95th)

Standard errors in parentheses.

Fig. 1. Interaction between time working together and team heterogeneity.

Fig. 2. Interaction between time working together and team support.

Alternative measures of IRR

Different model speciﬁcation

Variables (1) (2) (3) (4) (5)

Standard errors in parentheses.

Controlling for tenure and age dissimilarity

Time working together (since joining the PE ﬁrm)

Time working together (lead partner)

Fund size and PE ﬁrm age

Time and experience working together

TMT tenure diversity and TMT average tenure

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p < 0.001, p < 0.01, p < 0.05.