Do private equity target companies exhibit less effective governance structures

The Australian private equity investment sector recently experienced unparalleled levels of activity and achieved remarkable levels of growth. Whilst this type of investment is not a new facet of the Australian market, it has become the topic of significant interest to a number of differing market commentators, primarily due to the size and iconic stature of recent transactions. The objective of this study is to examine the hostile nature of private equity takeover bids. We investigate the unique corporate governance structures of Australian private equity target firms to establish the disciplinary motive underpinning a corporate buy-out. By doing so, this study provides a more informative insight into the determinants of Australian private equity takeover bids. We test our expectations using a sample of 43 publicly listed private equity target firms and a control sample of 182 conventional corporate targets, matched by year and industry, for the period 2001-2010. We find, relative to our benchmark sample, that private equity target firms are characterised by larger boards, a greater number of board meetings and a higher level of insider ownership. Multivariate testing indicates that private equity targets are more likely to have boards which perform a less effectual monitoring role and top management which is more likely to be entrenched in the firm. We find no evidence of a difference between the ownership structures of private equity and matched corporate targets. The principal implication of this study is to provide a greater understanding of the reasoning behind private equity’s target firm selection.