The Board Reorganization In Private Buyout Companies Sponsored By Private Equity Firms

This thesis aims to study the governance role of PE firms based on the private-to-private buyouts, as the existing academic literatures mostly focus on the public-to-private deals but the economic rationales and motivations driving the two type deals are distinctively different (Bodnaruk et al.2008; Chung,2011). Agency problem has been a solid foundation for understanding why and how PE firms reduce inefficiencies and thereby add values to the economy. However, private companies with concentrated ownership are less likely to suffer from it (Chung,2011). In contrast, they may face investment constraints caused by the information asymmetry and the high risk aversion of undiversified shareholders. By hand collecting222private deals in the UK from2003to2008and the data of directors sitting on board, I investigate the role of PE firms in board reorganization in terms of board size, board turnover and board capital using cross section, difference in difference panel data and logit regressions.In the sample, the board size of PE sponsored companies on average increases0.86within one year after the buyout. This differs from public buyouts which experience a board size shrink after going delist. In addition,61.0%of the incumbent directors are fired while70.7%are hired from outside. I find that PE firms play an active role in expanding the board size after the buyout and increasing the likelihood of incumbent directors being fired and new directors being hired. Besides, director age is a key determinant in firing incumbent board members. Older directors are more likely to be fired. Directorship year and directorship number are two important factors in hiring new directors but have reverse effects. Higher directorship year that proxies for board human capital decreases the likelihood of directors being hired, while higher directorship number that proxies for social capital increases the likelihood. Lastly, I show that PE firms have a selective effect on director characteristics when hiring outside directors. They prefer directors with more board capital relative to banks. This thesis makes three contributions to the current literatures. First, it contributes to the literature on the governance role of PE firms in buyout activities. Research in this area has long focused on the governance role of PE firms in public companies and consequently neglected private companies. The gap is filled by hand collecting a unique sample. It allows us to examine the board reorganization of private buyout companies sponsored by PE firms from both the firm level and the director level. Secondly, with detailed information about directors’working experience, the effects of board capital and director age in determining board turnover are explored. The findings of this study reveal that the two variables (directorship year and directorship number) used to measure working experience capture different dimensions of board capital. This adds to the literature on human capital and board turnover. Finally, the role of PE firms in identifying certain director characteristics is investigated. This enriches our understanding of how PE firms are selecting board members compared to banks based on directors’profiles.