Private equity activity and corporate governance’s spillover

Abstract

Purpose: We examine the impact of private equity on corporate governance across industries and countries. Design/methodology/approach: We gathered data from 15 countries and 16 industries spanning the period from 2005 to 2015 to construct an average corporate governance index and track private equity deals across both industries and countries. We analyze a country-industry-year panel dataset and address endogeneity issues. Findings: The results indicate a strong and significant relationship between private equity activity and corporate governance quality. When the private equity investment begins earlier, it is more relevant to the corporate governance quality. Foreign private equity investment seems to complement domestic private equity to improve corporate governance in settings with low domestic private equity activity. The experience of the fund that originates the private equity activity is also a determinant of the quality of the corporate governance spillover. Practical implications: Governments and institutions should promote private equity by creating a regulatory environment that attracts investment funds to countries or sectors that lack robust governance frameworks. Investors can design more effective governance practices according to the specific needs of their industries and countries. Shareholders would better understand how private equity corporate governance practices complement the company’s long-term strategies. Finally, the market would benefit from the confidence in private equity investors that promote international corporate governance practices that are valuable to the stakeholders. Originality/value: This research expands our understanding of the benefits of private equity activity on corporate governance quality across industries. We posit the importance of foreign private equity investors complementing domestic private equity activity and fund characteristics such as their experience in boosting corporate governance. © 2024, Hernán Herrera-Echeverri, Diego Cueto, Sandra Gaitan and Daniel Fragua.