Corporate Governance and Value Creation: Evidence from Private Equity

63 Pages Posted: 7 Apr 2009

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Moritz Hahn

Ludwig Maximilian University of Munich

Conor Kehoe

McKinsey & Company, Inc.

Multiple version iconThere are 3 versions of this paper

Date Written: March 2009

Abstract

We examine deal-level data on private equity transactions in the UK initiated during the period 1996 to 2004 by mature private equity houses. We un-lever the deal-level equity return and adjust for (un-levered) return to quoted peers to extract a measure of "alpha" or abnormal performance of the deal. The alpha is significantly positive on average and robust during sector downturns. In the cross-section of deals, higher alpha is related to greater improvement in EBITDA to Sales ratio (margin) and greater growth in EBITDA multiple during the private phase, relative to that of quoted peers. In particular, deals with higher alpha either grow their margins more substantially, and/or grow multiples more substantially, whilst expanding their revenues only in line with the sector. Based on interviews with general partners involved with the deals, we find that deals with higher alpha and higher margin growth are associated with greater intensity of engagement of private equity houses during the early phase of the deal, employment of value-creation initiatives for productivity and organic growth, and complementing top management with external support. Overall, our results are consistent with mature private equity houses creating value for portfolio companies through active ownership and governance.

Keywords: active ownership, activism, alpha, leveraged buyouts (LBO), management buyouts (MBO), management turnover

JEL Classification: G23, G24, G31, G32, G34

Suggested Citation

Acharya, Viral V. and Hahn, Moritz and Kehoe, Conor, Corporate Governance and Value Creation: Evidence from Private Equity (March 2009). CEPR Discussion Paper No. DP7242. Available at SSRN: https://ssrn.com/abstract=1372562

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Moritz Hahn

Ludwig Maximilian University of Munich ( email )

Ludwigstrasse 28 / 012
Munich, 80333
Germany
+49 (0)89 2108 6935 (Phone)

Conor Kehoe

McKinsey & Company, Inc. ( email )

1 Jermyn Street
London, SW1Y 4UH
United Kingdom
+44 (0)20 7961 5988 (Phone)

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