The Leveraged Invisible Hand: How Private Equity Enhances the Market for Corporate Control and Capitalism Itself

32 Pages Posted: 4 Jun 2018

See all articles by Edward Peter Stringham

Edward Peter Stringham

Trinity College; American Institute for Economic Research

Jack Vogel

Trinity College (Hartford CT) - Department of Economics

Date Written: May 2018

Abstract

What keeps corporate managers from underperforming or disregarding shareholders interests? In contrast to most scholars and policymakers who believe legal and regulatory oversight is key, Henry Manne's Mergers and the Market for Corporate Control describes a private or entirely invisible hand mechanism for disciplining managers to work for shareholders. The more underperforming firms have depressed stock prices, the more they become targets for buyouts and restructuring with new management. Funding much of these acquisitions is the private equity industry and its use of leveraged buyouts. Such buyouts concentrate ownership in the hands of private equity managers, and the high amount of leverage they use provides strong incentives for private equity managers to implement beneficial reforms. The expansion of private equity has helped to restructure scores of underperforming firms, has benefited equity and debt investors in this alternative investment space,and has enhanced corporate governance in society. This invisible hand mechanism works well and the recent expansion of control over the private equity industry by the Securities and Exchange Industry is unwarranted.

Keywords: alternative investments, mergers, acquisitions, leveraged buyouts, financial innovation, corporate governance, private governance

JEL Classification: G18, G23, G34

Suggested Citation

Stringham, Edward Peter and Vogel, Jack, The Leveraged Invisible Hand: How Private Equity Enhances the Market for Corporate Control and Capitalism Itself (May 2018). AIER Sound Money Project Working Paper No. 2018-09. Available at SSRN: https://ssrn.com/abstract=3189219 or http://dx.doi.org/10.2139/ssrn.3189219

Edward Peter Stringham (Contact Author)

Trinity College ( email )

Hartford, CT 06106
United States

American Institute for Economic Research ( email )

PO Box 1000
Great Barrington, MA 01230
United States

Jack Vogel

Trinity College (Hartford CT) - Department of Economics ( email )

United States

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