Do Private Equity Target Firms Exhibit Less Effectual Governance Structures?

Abstract

We investigate the unique corporate governance structure of Australian private equity target firms to establish the disciplinary motive underpinning a corporate buy-out. We test our expectations using a sample of 43 publicly listed private equity target firms and a control sample of 182 conventional corporate targets, matched by year and industry, for the period 2001-2010. The findings provide evidence of a less effectual corporate governance structure of private equity target firms in terms of monitoring their managers. Particularly, the univariate analysis reveal that relative to our benchmark sample, private equity target firms have larger boards, more board meetings and a greater inside ownership. Similarly, the multivariate results show that the probability of a firm being a private equity target increases with board size, percentage of insider directors, board meetings and CEO ownership. Consistent with Vafeas (1999), private equity target firms appear to perform ex post reactive monitoring role rather than ex ante proactive role. These results are important in improving our understanding of the reasoning behind private equity’s target firm selection.