Post by Sapphire Capital on Oct 24, 2008 19:05:12 GMT 4
Private Equity Executive Compensation
Daniel A. Ames
Southern Illinois University Carbondale
October 1, 2008
Abstract:
Following a sample of firms studied by Katz (2006), I hand collect compensation data from a sample of 77 firms that have privately held equity, but are SEC registrants due to publicly held debt. I then compare their compensation practices to those of a sample of firms with both publicly held debt and equity. I find that privately held firms tend to offer more less bonus compensation in levels, but more as a percentage of total income. Privately held firms in my sample offer less equity compensation, in levels and as a percentage of total income and less total compensation.
I propose three possible drivers for these differences and conduct tests for each one. Specifically, I find insignificant support for the first possible explanation that managers of private firms own more shares of the firms they manage than publicly held firms. In order to test the second possible explanation, that difficulties associated with the valuation and/or liquidity of private equity shares drive differences, I use an additional hand collected data set. Using this sample, which consists of 43 firms that have either "gone public" or "gone private" while maintaining public debt, I find significant differences in compensation generally consistent with my primary findings. These results support the second explanation. However, these results are also consistent with the third proposed explanation, that superior monitoring among firms with private debt drives compensation differences. In order to differentiate, I conduct a third set of tests focusing specifically on monitoring, using earnings management as a proxy. I find no significant differences in frequency and magnitude of earnings management between private equity firms with public debt and public equity firms with public debt. These results are consistent with the second proposed explanation - that privately held firms compensate their managers differently due to inherent difficulty in valuing and/or liquidating equity shares.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1276676
Daniel A. Ames
Southern Illinois University Carbondale
October 1, 2008
Abstract:
Following a sample of firms studied by Katz (2006), I hand collect compensation data from a sample of 77 firms that have privately held equity, but are SEC registrants due to publicly held debt. I then compare their compensation practices to those of a sample of firms with both publicly held debt and equity. I find that privately held firms tend to offer more less bonus compensation in levels, but more as a percentage of total income. Privately held firms in my sample offer less equity compensation, in levels and as a percentage of total income and less total compensation.
I propose three possible drivers for these differences and conduct tests for each one. Specifically, I find insignificant support for the first possible explanation that managers of private firms own more shares of the firms they manage than publicly held firms. In order to test the second possible explanation, that difficulties associated with the valuation and/or liquidity of private equity shares drive differences, I use an additional hand collected data set. Using this sample, which consists of 43 firms that have either "gone public" or "gone private" while maintaining public debt, I find significant differences in compensation generally consistent with my primary findings. These results support the second explanation. However, these results are also consistent with the third proposed explanation, that superior monitoring among firms with private debt drives compensation differences. In order to differentiate, I conduct a third set of tests focusing specifically on monitoring, using earnings management as a proxy. I find no significant differences in frequency and magnitude of earnings management between private equity firms with public debt and public equity firms with public debt. These results are consistent with the second proposed explanation - that privately held firms compensate their managers differently due to inherent difficulty in valuing and/or liquidating equity shares.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1276676