Private Equity Investors as Corporate Governance Mechanism in Continental Europe

This paper investigates the strategy of private equity investors to take public companiesprivate in blockholder-based economies. Drawing on a unique dataset, we providestrong evidence that private equity investors buy companies in order to mitigatepotential agency problems and hence to improve the corporate governance. Firms withrelatively low or high managerial ownership, high debt capacity and a combination ofstrong free cash flows and low growth opportunities are more likely to become a privateequity target. With regard to the particular continental European ownership structure,the going private companies have larger blockholders and a higher ownershipconcentration than their publicly remaining counterparts. Hence, the gaining ofirrevocable commitments seems to be more important to private equity investors thanmonitoring and private benefits considerations.