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Managerial Incentives and Value Creation: Evidence from Private Equity

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  • Phillip Leslie
  • Paul Oyer

Abstract

We analyze the differences between companies owned by private equity (PE) investors and similar public companies. We document that PE-owned companies use much stronger incentives for their top executives and have substantially higher debt levels. However, we find little evidence that PE-owned firms outperform public firms in profitability or operational efficiency. We also show that the compensation and debt differences between PE-owned companies and public companies disappear over a very short period (one to two years) after the PE-owned firm goes public. Our results raise questions about whether and how PE firms and the incentives they put in place create value.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14331.

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Date of creation: Sep 2008
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Handle: RePEc:nbr:nberwo:14331

Note: CF IO LE LS
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  1. Cressy, Robert & Munari, Federico & Malipiero, Alessandro, 2007. "Playing to their strengths? Evidence that specialization in the private equity industry confers competitive advantage," Journal of Corporate Finance, Elsevier, vol. 13(4), pages 647-669, September.
  2. Richard Harris & Donald S. Siegel & Mike Wright, 2005. "Assessing the Impact of Management Buyouts on Economic Efficiency: Plant-Level Evidence from the United Kingdom," The Review of Economics and Statistics, MIT Press, vol. 87(1), pages 148-153, February.
  3. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  4. Ulf Axelson & Tim Jenkinson & Per Strömberg & Michael S. Weisbach, 2008. "Leverage and Pricing in Buyouts: An Empirical Analysis," OFRC Working Papers Series 2008fe20, Oxford Financial Research Centre.
  5. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 653-691, August.
  6. Bargeron, Leonce L. & Schlingemann, Frederik P. & Stulz, René M. & Zutter, Chad J., 2008. "Why do private acquirers pay so little compared to public acquirers?," Journal of Financial Economics, Elsevier, vol. 89(3), pages 375-390, September.
  7. Jerry Cao & Josh Lerner, 2006. "The Performance of Reverse Leveraged Buyouts," NBER Working Papers 12626, National Bureau of Economic Research, Inc.
  8. Charles P. Himmelberg & R. Glenn Hubbard & Darius Palia, 2000. "Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance," NBER Working Papers 7209, National Bureau of Economic Research, Inc.
  9. Phillippe Desbrières & Alain Schatt, 2002. "The Impacts of LBOs on the Performance of Acquired Firms: The French Case," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(5&6), pages 695-729.
  10. Bengt Holmstrom & Steven N. Kaplan, 2001. "Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 121-144, Spring.
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  13. Steven J. Davis & John C. Haltiwanger & Ron S. Jarmin & Josh Lerner & Javier Miranda, 2011. "Private Equity and Employment," NBER Working Papers 17399, National Bureau of Economic Research, Inc.
  14. Muscarella, Chris J & Vetsuypens, Michael R, 1990. " Efficiency and Organizational Structure: A Study of Reverse LBOs," Journal of Finance, American Finance Association, vol. 45(5), pages 1389-1413, December.
  15. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
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  17. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
  18. Baker, George P. & Wruck, Karen H., 1989. "Organizational changes and value creation in leveraged buyouts : The case of the O.M. Scott & Sons Company," Journal of Financial Economics, Elsevier, vol. 25(2), pages 163-190, December.
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  20. Smith, Abbie J., 1990. "Corporate ownership structure and performance *1: The case of management buyouts," Journal of Financial Economics, Elsevier, vol. 27(1), pages 143-164, September.
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Cited by:
  1. Bandiera, Oriana & Guiso, Luigi & Prat, Andrea & Sadun, Raffaella, 2009. "Matching Firms, Managers, and Incentives," CEPR Discussion Papers 7207, C.E.P.R. Discussion Papers.
  2. Bannier, Christina E. & Feess, Eberhard, 2010. "When high-powered incentive contracts reduce performance: choking under pressure as a screening device," Frankfurt School - Working Paper Series 135, Frankfurt School of Finance and Management.
  3. Pierre Chaigneau, 2010. "The Optimal Timing of Executive Compensation," FMG Discussion Papers dp660, Financial Markets Group.
  4. Olsson, Martin & Tåg, Joacim, 2012. "Private Equity and Employees," Working Paper Series 906, Research Institute of Industrial Economics.
  5. Lopez-de-Silanes, Florencio & Phalippou, Ludovic & Gottschalg, Olivier, 2010. "Giants at the Gate: On the Cross-section of Private Equity Investment Returns," MPRA Paper 28487, University Library of Munich, Germany.
  6. repec:dgr:uvatin:2011035 is not listed on IDEAS
  7. Jesse Edgerton, 2011. "Agency problems in public firms: evidence from corporate jets in leveraged buyouts," Finance and Economics Discussion Series 2011-15, Board of Governors of the Federal Reserve System (U.S.).

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