Private equity firms and management control: the framing of shareholder-oriented practices
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Private equity firms and management control: the framing of shareholder‑oriented practices Andrea Dello Sbarba1 · Riccardo Giannetti1 · Alessandro Marelli2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper seeks to respond to the call for further research into the management control mechanisms (MCMs) used in inter-organizational relationships between private equity (PE) and portfolio firms. We based our analysis on the concept of change agent developed in institutional studies and the concepts of framing and frame alignment. Drawing on a multiple case study, this paper investigates the deployment of MCMs by PE firms with the aim at promoting and sustaining the shareholder focused frame and ensuring an effective alignment of portfolio companies. The study then shifts its focus on the reasons for distinct relevance of such MCMs based on the context-specific frame. Findings show the variety of MCMs that may be used in aligning interests of portfolio firm managers, considering PE firms as a case of inter-firm relationship between interdependent actors. Keywords Management control mechanisms · Inter-organizational relationship · Shareholder-focused frame · Private equity · Framing
* Andrea Dello Sbarba [email protected] Riccardo Giannetti [email protected] Alessandro Marelli [email protected] 1
Department of Economics and Management, University of Pisa, Pisa, Italy
2
Faculty of Political Science, University of Teramo, Teramo, Italy
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1 Introduction Over the past two decades, PE firms have become an important component of global financial markets (Gilligan and Wright 2010; McKinsey 2018; Wright et al. 2009b).1 By definition a PE firm is identified as “a financial intermediary (…) that invests only in private companies (…), taking an active role in monitoring and helping the companies in its portfolio (…) with the primary goal of maximizing its financial return” (Metrick and Yasuda 2011, p. 621).2 Since Jensen’s (1986) seminal paper, the relevance of this global phenomenon has sparked academic interest in the exploring PE mechanisms to control portfolio firms (Gilligan and Wright 2010; Wood and Wright 2009). In this field, agency theory predominantly informed the research on control, and the concepts of corporate governance structure and contractual arrangements (i.e. concentrated ownership, increased leverage, greater managerial equity ownership and formal contractual arrangements) are investigated as means to decrease agency costs and to enhance PE investments’ performance (Fenn et al. 1997; Kaplan and Strömberg 2003, 2009; Wright et al. 2009a). Several calls highlighted the need to broaden the concept of governance beyond the compliance to a set of rules in order to study the gap between corporate governance studies and the business success literature (Cinquini et al. 2013; Elgharbawy and AbdelKader 2013). However, only a few studies have investigated the inter-organizational management control mecha
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