Do Corporate Governance Motives Drive Hedge Funds and PrivateEquity Activities?

We address the question of whether hedge fund and private equity investments in public firms are motivatedby corporate governance improvements. As opposed to traditional financial investors both HF and PE arelikely to have the incentives to alleviate agency conflicts. However, against the background of differences intheir business models and organizational set ups, it remains an empirical question of whether they addressthe same or different agency conflicts. Studying HF and PE activities in a typical Continental Europeanmarket like Germany promises to offer interesting insights about how HF and PE activities relate to theprevalence of family ownership, concentrated ownership structures and conflicts among majority and minorityowners. We document empirical evidence that both HF and PE investments are driven by corporategovernance improvements, but seem to address different types of agency conflicts. Whereas HF focus onfirms with a lack of a controlling shareholder, in particular family shareholders, PE invest in firms whichexhibit the potential to align manager-shareholder interests due to low managerial ownership. Both appearto address free cash flow problems differently. Aiming at dividend increases, HF tend use commitment devicesthat can be implemented over a short horizon. In contrast, PE are inclined to target firms which areparticularly well-suited for a leverage increase because of low expected financial distress costs. This strategyrequires a sufficiently long investment horizon.