Private Equity Shareholder Activism

46 Pages Posted: 19 Sep 2011 Last revised: 29 May 2012

See all articles by Christian Rauch

Christian Rauch

American University of Sharjah

Marc P. Umber

Frankfurt School of Finance & Management

Sven Furth

Goethe University Frankfurt - Chair of Banking and Finance; Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: January 2, 2012

Abstract

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.

Keywords: private equity, shareholder activism, venture capital

JEL Classification: G24

Suggested Citation

Rauch, Christian and Umber, Marc P. and Furth, Sven, Private Equity Shareholder Activism (January 2, 2012). Available at SSRN: https://ssrn.com/abstract=1929159 or http://dx.doi.org/10.2139/ssrn.1929159

Christian Rauch

American University of Sharjah ( email )

P.O. Box 26666
University City
Sharjah, Greater Dubai Area
United Arab Emirates

Marc P. Umber (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

Sven Furth

Goethe University Frankfurt - Chair of Banking and Finance ( email )

Grüneburgplatz 1
P.O. Box 11932
Frankfurt (Main), 60323
Germany

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, D-60323
Germany

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