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This corporate governance study investigates the relationships among agency theory, potential for operational engineering and firm underperformance. The empirical setting is a set of PE (private equity) buyouts in the US from 1998 to 2007, building on earlier research on LBOs (leveraged buyouts). I employ direct measures of agency costs to test Jensen's free cash flows proposition as well as a new proposition by Kaplan, according to whom potential for operational engineering is a predictor of buyout activity in addition to agency conditions. I control for competing risks with a Cox proportional hazards model. My evidence fails to lend strong support for either proposition as an antecedent of buyout activity (direct effects). Finally, I find that, in the context of high asset inefficiencies (high potential for operational engineering) and high board independence, the probability of buyout activity is decreased.