Private Equity and Entrepreneurial Governance: Time for a Balanced View

Academy of Management Perspectives, Forthcoming

30 Pages Posted: 14 Apr 2013

See all articles by Peter G. Klein

Peter G. Klein

Baylor University - Hankamer School of Business; Norwegian School of Economics (NHH) - Department of Strategy and Management; Ludwig von Mises Institute

John L. Chapman

Hill & Cutler Co.

Mario P. Mondelli

Center for Economic Research - CINVE

Date Written: February 2013

Abstract

Private equity is best understood not as a financing method but as a governance structure, one that emphasizes strong performance incentives, rules over discretion, and a strong alignment between ownership and management. Briefly, private equity governance makes owners into active managers and makes managers behave like owners. As such, private equity is often regarded as a more “entrepreneurial” form of governance than that associated with the publicly traded corporation. We argue for a balanced view in which private equity is best regarded as a governance structure that, like all forms of organization, has benefits and costs that vary according to circumstances. Building on the “judgment-based” view of entrepreneurship, we note that managers of privately held firms, as owners, exercise a strong degree of entrepreneurial judgment over the use of assets, unlike salaried executives of publicly held companies. At the same time, however, privately held firms are often constrained from pursuing potentially attractive profit opportunities by the nature of their debt obligations. Private equity is not a panacea, and buyouts do not necessarily generate the typical outward markers of innovation such as patents, employment growth, and the establishment of new enterprises.

Keywords: private equity, entrepreneurship, judgment

JEL Classification: G32, M13, L2

Suggested Citation

Klein, Peter G. and Chapman, John L. and Mondelli, Mario P., Private Equity and Entrepreneurial Governance: Time for a Balanced View (February 2013). Academy of Management Perspectives, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2250490

Peter G. Klein (Contact Author)

Baylor University - Hankamer School of Business ( email )

Waco, TX 76798
United States
254-710-4903 (Phone)

Norwegian School of Economics (NHH) - Department of Strategy and Management ( email )

Breiviksveien 40
N-5045 Bergen
Norway

Ludwig von Mises Institute ( email )

Auburn, AL
United States

John L. Chapman

Hill & Cutler Co.

United States

Mario P. Mondelli

Center for Economic Research - CINVE ( email )

Uruguay 1242
Montevideo, 11100
United States

HOME PAGE: http://www.cinve.org.uy/mondelli/index.html

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