Do corporate governance motives drive hedge fund and private equity fund activities?

We address the question of whether hedge fund and p rivate equity investments in public firms are motiv ated by corporate governance improvements. As opposed to traditional financial investors both HF and PE are likely to have the incentives to alleviate agency c onflicts. However, against the background of differ ences in their business models and organizational set ups, i t remains an empirical question of whether they add ress the same or different agency conflicts. Studying HF and PE activities in a typical Continental Europea n market like Germany promises to offer interesting i nsights about how HF and PE activities relate to th e prevalence of family ownership, concentrated owners hip structures and conflicts among majority and mi- nority owners. We document empirical evidence that both HF and PE investments are driven by corporate governance improvements, but seem to address differ ent types of agency conflicts. Whereas HF focus on firms with a lack of a controlling shareholder, in particular family shareholders, PE invest in firms which exhibit the potential to align manager-shareholder interests due to low managerial ownership. Both app ear to address free cash flow problems differently. Aim ing at dividend increases, HF tend use commitment d e- vices that can be implemented over a short horizon. In contrast, PE are inclined to target firms which are particularly well-suited for a leverage increase be cause of low expected financial distress costs. Thi s strate- gy requires a sufficiently long investment horizon.     «

We address the question of whether hedge fund and p rivate equity investments in public firms are motiv ated by corporate governance improvements. As opposed to traditional financial investors both HF and PE are likely to have the incentives to alleviate agency c onflicts. However, against the background of differ ences in their business models and organizational set ups, i t remains an empirical question of whether they add ress the same or different agency conflicts. Studying HF and PE activit...     »