Does Private Equity Create Wealth? The Effects of Private Equity and Derivatives on Corporate Governance

Abstract:     
Private equity has reaped large rewards in recent years. We claim that one major reason for this success is due to the corporate governance advantages of private equity over the public corporation. We argue that the development of substantial derivative contracts and trading has significantly weakened the governance of public corporations and has created a need for financially sophisticated directors and much closer supervision of management. The private equity model delivers these benefits and allows corporations to be better governed, creating wealth gains for investors.

Keywords: private equity, corporate governance, contracts, trading, public corporations, subprime

JEL Classifications: G34, K20, K22

Accepted Paper Series