Are Private Equity Investors Governance Champions Or Simply Stock Picking Specialists?

Author: Marc Steffen Rapp (TUM SCHOOL OF MANAGEMENT), Matthias Kroker (TUM SCHOOL OF MANAGEMENT), Michael Wolff (LEIPZIG GRADUATE SCHOOL OF MANAGEMENT)

 

Track 5 - Corporate Governance General Track (1), Best paper nominee

We examine announcement returns of private equity investments in publicly listed firms. Using a novel and hand-collected data set of 377 European transactions between 1997 and 2006 we find substantial announcement returns accumulating to some 10.3%. Target firms are substantially undervalued prior to the transaction. However, we find no evidence that operating performance of target firms increases after the transaction. Our findings are consistent with the view that private equity firms have superior stock picking abilities which allow them to identify and invest in undervalued firms. In contrast, our findings do not support the view that private equity funds are able act as governance champions improving firms‟ operating performance.

 

Keywords: Private Equity, Governance Champions, Firm Performance