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Do corporate governance motives drive hedge funds and private equity activities?

  • Achleitner, Ann-Kristin
  • Betzer, André
  • Gider, Jasmin
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    We address the question of whether hedge fund and private equity investments in public firms are motivated by corporate governance improvements. As opposed to traditional financial investors both HF and PE are likely to have the incentives to alleviate agency conflicts. However, against the background of differences in their business models and organizational set ups, it remains an empirical question of whether they address the same or different agency conflicts. Studying HF and PE activities in a typical Continental European market like Germany promises to offer interesting insights about how HF and PE activities relate to the prevalence of family ownership, concentrated ownership structures and conflicts among majority and minority owners. We document empirical evidence that both HF and PE investments are driven by corporate governance improvements, but seem to address different types of agency conflicts. Whereas HF focus on firms with a lack of a controlling shareholder, in particular family shareholders, PE invest in firms which exhibit the potential to align manager-shareholder interests due to low managerial ownership. Both appear to address free cash flow problems differently. Aiming at dividend increases, HF tend use commitment devices that can be implemented over a short horizon. In contrast, PE are inclined to target firms which are particularly well-suited for a leverage increase because of low expected financial distress costs. This strategy requires a sufficiently long investment horizon.

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    Paper provided by Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München in its series CEFS Working Paper Series with number 2008-11.

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    Date of creation: 2008
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    Handle: RePEc:zbw:cefswp:200811
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    1. Frank R Lichtenberg & Donald Siegel, 1989. "The Effects Of Leveraged Buyouts On Productivity And Related Aspects Of Firm Behavior," Working Papers 89-5, Center for Economic Studies, U.S. Census Bureau.
    2. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
    3. Kaserer, C. & Schiereck, D. & Achleitner, A.-K. & von Einem, C., 2007. "Private Equity in Deutschland," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 34979, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    4. 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.
    5. Josh Lerner & Morten Sørensen & Per Strömberg, 2008. "Private Equity and Long-Run Investment: The Case of Innovation," NBER Working Papers 14623, National Bureau of Economic Research, Inc.
    6. Song, Moon H. & Walkling, Ralph A., 1993. "The Impact of Managerial Ownership on Acquisition Attempts and Target Shareholder Wealth," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(04), pages 439-457, December.
    7. Alon Brav & Wei Jiang & Frank Partnoy & Randall Thomas, 2008. "Hedge Fund Activism, Corporate Governance, and Firm Performance," Journal of Finance, American Finance Association, vol. 63(4), pages 1729-1775, 08.
    8. Charlie Weir & Mike Wright & Louise Scholes, 2008. "Public-to-private buy-outs, distress costs and private equity," Applied Financial Economics, Taylor & Francis Journals, vol. 18(10), pages 801-819.
    9. Correia da Silva, Luis & Goergen, Marc & Renneboog, Luc, 2004. "Dividend Policy and Corporate Governance," OUP Catalogue, Oxford University Press, number 9780199259304, March.
    10. Dimitris Margaritis & Maria Psillaki, 2007. "Capital Structure and Firm Efficiency," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9-10), pages 1447-1469.
    11. Gugler, Klaus & Yurtoglu, B. Burcin, 2003. "Corporate governance and dividend pay-out policy in Germany," European Economic Review, Elsevier, vol. 47(4), pages 731-758, August.
    12. Claudio Loderer & Urs Peyer, 2002. "Board Overlap, Seat Accumulation and Share Prices," European Financial Management, European Financial Management Association, vol. 8(2), pages 165-192.
    13. Renneboog, Luc & Simons, Tomas & Wright, Mike, 2007. "Why do public firms go private in the UK? The impact of private equity investors, incentive realignment and undervaluation," Journal of Corporate Finance, Elsevier, vol. 13(4), pages 591-628, September.
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