Private Equity Shareholder Activism
Goethe University Frankfurt
Marc P. Umber
Frankfurt School of Finance & Management
Goethe University Frankfurt - Chair of Banking and Finance; Goethe University Frankfurt - Faculty of Economics and Business Administration
January 2, 2012
This paper analyzes the degree and type of private equity firm activism in portfolio companies. Using hand-collected data on 211 private equity investments over the period 1997-2009, we are able to distinguish between different kinds of activism of private equity firms such as board and management reorganizations, balance sheet restructurings or the utilization of private equity firm industry-specific skills. We additionally differentiate between “good” activism which is economic value adding, or “evil” activism which is purely earnings management-driven. Our results show that both buyout and venture capital firms invest with varying degrees and types of activism. We also find that earnings management is a pivotal part of an active investment strategy, both for buyouts and venture deals. The choice for pursuing active or passive strategies depends on the respective buyout and venture firms’ overall business models. However, the PE firms also adjust their investment styles in accordance with the specifics of each single portfolio firm. Activism also has a positive long-term effect on stock performance relative to firms backed by passive private equity investors.
Number of Pages in PDF File: 46
Keywords: private equity, shareholder activism, venture capital
JEL Classification: G24working papers series
Date posted: September 19, 2011 ; Last revised: May 29, 2012
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