Is private equity a superior organizational form?
A review of literature by Pham Minh Tung
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Abstract
The best management form of organizations has always been the topic of disagreement amongst finance scholars. The most popular organizational form so far has been public corporation, though it has been being persistently attacked by criticism against the agency cost. This paper provides a brief review of literature and evidences on the questioned superiority of private equity as an alternative organizational form. This form was quite popular in 1980s, then precipitated and has resurfaced in 2006.
Introduction
In a leveraged buyout, a company is acquired by a specialized investment firm using a relatively small portion of equity and a
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The form had solved the persistent issue of public company which is the conflict between company managers and shareholders. Moreover, the high concentration of ownership in the excutives made the company become efficiently managed with minimum overhead costs. This performance – based management was said to be superior to the old – fashioned way which relied on split ownership as well as a weak corporate governance. Jensen (1989) even predicted that private equity would soon become the supreme organization management form.
It turned out to be that Jensen's suggestion was premature. The wave of bankruptcy due to the crash of the junk bond market literally swept away approximately 190 billion dollars and then this once – promising organizational form virtually disappeared by the early 1990s.
Nonetheless, we have been witnessing a strong raise, even stronger than that in 1980s, of private equity since mid – 2000s. There should be a good explanation for that spectacular return of the form. In this paper, we will review the changes in various aspects of corporate governance that introduced by private equity as well as the corresponding economic effect of these
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There is a potential bias toward better performance of privatized firms, motsly selection bias due to data availability. For studies of leveraged buyouts in the United States, most of them examine the data of leveraged buyouts that use public debt or subsequently go public, and leveraged buyouts of public company. These data may not satisfiedly represent the population. The authors also mention that studies undertaken in countries where private firms accounting data are transparent like France or Sweden, are still trustworthy. However, even studies undertaken in these countries show inconsistency. Bergstrom, Grubb and Jonsson (2007) find significant operating improvement after leveraged buyouts in Sweden, whereas Tatahi and Heshmati (2009) find out that the Swedish enterprises did change after privatization but not
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