Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts

Abstract

This paper uses rich, new data to examine the fleets of corporate jets operated by both publicly traded and privately held firms. In the cross-section, firms owned by private equity funds average jet fleets at least 40% smaller than observably similar publicly-traded firms. Similar fleet reductions are observed within firms that go private in leveraged buyouts. I discuss assumptions under which comparisons across and within firms provide estimates of lower and upper bounds on the average treatment effect of taking a firm from public to private in a leveraged buyout. Both censored and standard quantile regressions suggest that results at the mean are driven by firms in the upper 30% of the conditional jet distribution. Results thus suggest that executives in a substantial minority of public firms enjoy more generous perquisites than they would if subject to the pressures of private equity ownership.

Do Private Equity Returns Result from Wealth Transfers and Short-Termism? Evidence from a Comprehensive Sample of Large Buyouts

“…Because private equity firms select portfolio firms partly on the basis of lower expected capital expenditures, this by itself is not evidence of suboptimal investment policy. It could be indicative of lower agency costs, consistent with the findings ofEdgerton (2011).…”

“…As a result, research on exit outcomes of buyouts has been largely limited to portfolio companies that were exited via IPO (eg., Cao and Lerner, 2009, Degeorge and Zeckhuaser, 1993, Holthausen and Larcker, 1996, Mian and Rosenfeld, 1993, Muscarella and Vetsuypens, 1990. Likewise, as Kaplan and Stromberg (2009) point out in their survey article, research on the operating performance of portfolio companies has been largely limited either to portfolio companies that were public before or after the buyout (e.g., Edgerton, 2011, Kaplan, 1989, Smith, 1990, Guo, Hotchkiss, and Song, 2011, or to countries that require private companies to disclose financial statements (e.g., Boucly, Sraer and Thesmar, 2011, Bergstrom, Grubb and Jonsson, 2007, Harris, Siegel and Wright, 2005, and Renneboo, Simons and Scholes, and Wright, 2005.…”

Comments on Shan and Walter: ‘Towards a Set of Design Principles for Executive Compensation Contracts’

“…Shareholders don't need CEOs to have such easy access to leisure. A telling paper by Edgerton () shows that when companies are acquired by private equity in leveraged buyouts, they make aggressive cuts in their fleets of jets.…”

The Long and Short of It: Do Public and Private Firms Invest Differently?

“…Lerner, Sorensen, and Stromberg (2011) use patent data to document that firms undergoing leveraged buyouts (LBOs) register more important patents after going private, while Bernstein (2015) uses similar patent data to document declines in patent quality post-IPO. Edgerton (2012) uses data from corporate jet registrations and finds that jet fleet sizes decline when firms are taken private in LBOs, consistent with managerial overconsumption of perks among public firms. In the paper most similar to ours, Asker, Farre-Mensa, and Ljungqvist (2015) combine Compustat data with data from Sageworks, which collects accounting data for a non-random sample of private firms that are clients of a set of national and regional accounting firms.…”