Managerial Incentives and Value Creation: Evidence from Private Equity

Phillip Leslie · Paul Oyer

86 citations0/0 files storedNational Bureau of Economic Research

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Private Equity and Venture Capital Financial Markets and Investment Strategies Corporate Finance and Governance

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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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1996Agency costs of free cash flow, corporate finance, and takeovers 1999Understanding the determinants of managerial ownership and the link between ownership and performance 2008Executive compensation 2005Private Equity Performance: Returns, Persistence, and Capital Flows 2005Pay without performance: the unfulfilled promise of executive compensation 1999Eclipse of the Public Corporation 1999Chapter 38 Executive compensation

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2017Executive Compensation: A Survey of Theory and Evidence ✶ ✶We thank Aubrey Clark, Fabrizio Ferri, Carola Frydman, Tom Gosling, Steve Kaplan, Gaizka Ormazabal, Kelly Shue, Alexander Wagner, David Zhang, and especially Pierre Chaigneau for helpful comments and Janet Chater, Irem Erten, Jesus Gorrin, Joseph Kalmenovitz, and Jiaying Wei for research assistance.2013CEO contract design: How do strong principals do it?2008Private Equity, Corporate Governance, and the Reinvention of the Market for Corporate Control 2012Private Equity Lemons?Evidence on Value Creation in Secondary Buyouts

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