Private Equity And Corporate Governance

Private equity market in China obtained a sustained and rapid development in the recentdecade, the number of PE firms and their management of capital volume both had asubstantial growth, and many listed companies before the IPO gained the support of PEinvestments. But many listed companies have poor performance after IPO, and their corporategovernance is still not perfect. Whether PE can improve corporate governance has become animportant proposition.From the famous agency theory, this paper discusses the dual agency relationship in the PEactivities. For moral hazard problem in the second layer of agency relationship, analyzes howPE plays a "motivator" and "supervisor" role; Then from "relationship financing" perspectiveto analyze PE also plays a positive "modifier" role. To solve the problem of informationasymmetry, to obtain greater return on investment and maintain its reputation, PE willactively participate in corporate governance. Finally, based on the data of listed companies onGrowth Enterprises Market (GEM) board in China among2009~2012, this paper appliesPrincipal Component Analysis to establish Corporate Governance Index, tests the privateequity’s influence on corporate governance, the result shows that PE will significantlyimprove our corporate governance, the State-owned background and experienced PEs’ abilityto improve corporate governance are relatively high, however, PE’s joint investment also canimprove the corporate governance.The innovation of this paper is not to analyze the impact of PE limited in the framework ofthe Principal-agent Theory, but also draws on the "relationship financing" theory, innovativelybuilds Corporate Governance Index in the study of PE and corporate governance in empiricalresearch, and further studies the effects of different features of PE on the corporategovernance, enriches the literature of PE and corporate governance research.