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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.

Suggested Citation

  • Phillip Leslie & Paul Oyer, 2008. "Managerial Incentives and Value Creation: Evidence from Private Equity," NBER Working Papers 14331, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14331
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    Cited by:

    1. 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.
    2. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2015. "Matching Firms, Managers, and Incentives," Journal of Labor Economics, University of Chicago Press, vol. 33(3), pages 623-681.
    3. Steven J. Davis & John C. Haltiwanger & Kyle Handley & Ben Lipsius & Josh Lerner & Javier Miranda, 2021. "The economic effects of private equity buyouts," Jena Economics Research Papers 2021-013, Friedrich-Schiller-University Jena.
    4. 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.).
    5. Yang, Junhong & Guariglia, Alessandra & Guo, Jie (Michael), 2019. "To what extent does corporate liquidity affect M&A decisions, method of payment and performance? Evidence from China," Journal of Corporate Finance, Elsevier, vol. 54(C), pages 128-152.
    6. Troy D. Smith, 2015. "Private Equity Investment in India: Efficiency vs Expansion," Discussion Papers 15-011, Stanford Institute for Economic Policy Research.
    7. 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.
    8. Martin Olsson & Joacim Tåg, 2017. "Private Equity, Layoffs, and Job Polarization," Journal of Labor Economics, University of Chicago Press, vol. 35(3), pages 697-754.
    9. Victor Esteban Jarosiewicz, 2019. "CEO Compensation after Harvester Director Departure," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 1-21, March.
    10. Stefano Bonini, 2012. "Secondary Buyouts," Working Papers 441, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    11. Pierre Chaigneau, 2010. "The Optimal Timing of Executive Compensation," FMG Discussion Papers dp660, Financial Markets Group.
    12. Steven J. Davis & John C. Haltiwanger & Kyle Handley & Ben Lipsius & Josh Lerner & Javier Miranda, 2019. "The (Heterogenous) Economic Effects of Private Equity Buyouts," NBER Working Papers 26371, National Bureau of Economic Research, Inc.
    13. Viral V. Acharya & Oliver F. Gottschalg & Moritz Hahn & Conor Kehoe, 2013. "Corporate Governance and Value Creation: Evidence from Private Equity," The Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 368-402.
    14. Grupp, Marcel & Rauch, Christian & Umber, Marc P. & Walz, Uwe, 2015. "The influence of leveraged buyouts on target firms' competitors," SAFE Working Paper Series 99, Leibniz Institute for Financial Research SAFE.
    15. Kim, Tae-Nyun & Palia, Darius, 2014. "Private equity alliances in mergers," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 10-20.
    16. Tim Jenkinson & Stefan Morkoetter & Thomas Wetzer, 2018. "Buy Low, Sell High? Do Private Equity Fund Managers Have Market Abilities?," Working Papers on Finance 1813, University of St. Gallen, School of Finance.
    17. Ayash, Brian & Schütt, Harm, 2016. "Does going private add value through operating improvements?," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 192-215.

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    More about this item

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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