Managerial Incentives and Value Creation: Evidence from Private Equity

Managerial Incentives and Value Creation: Evidence from Private Equity

By Philip Leslie, Paul Oyer
September 2008Working Paper No. 3309

We analyze the differences between companies owned by private equity (PE) investors and similar public companies. We document that PE-owned companies use much stronger incentives for their top executives and have substantially higher debt levels. However, we find little evidence that PE-owned firms outperform public firms in profitability or operational efficiency. We also show that the compensation and debt differences between PE-owned companies and public companies disappear over a very short period (one to two years) after the PE-owned firm goes public. Our results raise questions about whether and how PE firms and the incentives they put in place create value.