Institutional determinants of economic efficiency in private equity financing : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

Private equity (henceforce PE)is less regulated than its bank peers. Paralleling financial liberalisation in recent decades, the PE-market was booming in transaction size with ever-evolving financing strategies. As PE became a favourable funding source of start-ups and stressed businesses, anecdotal evidence suggests that PEs are trapped in failure deals just as much as they breed technology/business giants. The development of PE has drawn attention to the synchronising of existing shareholder rights and creditor rights with this new financing agent. The literature in finance and law has paid little attention to the PE market. Hence, this study aims to examine the relationship between regulation and the efficiency of PE-backed financing. The study also investigates the broader scope institutional environment where informal institutions are expected to shape deal efficiency on top of the legal bonding.

To explore the research objectives, this study employs the financing cost of PE-backed enterprises as a measure of efficiency. Using two-stage least squares regression, I investigate the impact of the institutional environment on the financing cost of PE-backed transactions between 1970 and 2016. The results suggest that PE-backed deals cost less when shareholder rights and creditor rights are solid. I also find that the impact of informal institutions is two fold contingent on financing strategies.