Spreading Sunshine in Private Equity: Financial Intermediation and Regulatory Oversight

Abstract

This paper studies the role of regulatory oversight in increasing market transparency and facilitating financial intermediation. I leverage an unanticipated reform that substantially expanded the regulatory oversight of private equity (PE) fund advisers, mitigating information frictions faced by investors. The enhanced regulatory oversight increases investors' PE market participation and reduces their incentives to bypass intermediation. Without intermediation, investors tend to finance more mature, larger, and less innovative companies, in contrast to investing through PE funds. Overall, these findings highlight the limits of market discipline and the positive role of regulatory oversight in PE markets.

Keywords: Financial Regulation, Transparency, Governance, Private Equity, Market Organization, Institutional Investors, Dodd-Frank Act

JEL Classification: G23, G24, G28, K22, L22, L51