The effects of private equity investors on the governance of companies

Abstract

An increasingly important external control mechanism affecting the governance of young and fast growing companies worldwide is the emergence of institutional and private equity investors, as equity owners. Institutional investors have the potential to influence management’s activities directly through their ownership, and indirectly by trading their shares (Gillan and Starks, 2003). As a result, companies backed by private equity investors represent a fruitful environment to investigate the use and efficiency of a multitude of control mechanisms. However the surge over the last 30 years in investment activity by private equity investors at large, has given rise to an increased specialization that nowadays profoundly distinguishes business angels from venture capitalists and buyout specialists. While these investors share common traits such as a value maximization approach, risk-return informed decisions, and a finite investment horizon, the monitoring and control mechanisms associated with their stage focus and consequent risk-return profile are substantially different. In this paper we aim at presenting an up-to-date review of the main theoretical contributions and empirical results in this active and growing field of research.