The Leveraged Invisible Hand: How Private Equity Enhances the Market for Corporate Control and Capitalism Itself
Originally published in European Journal of Law and Economics
What keeps corporate managers from underperforming or disregarding shareholders’ interests? In contrast to most scholars and policymakers who believe legal and regulatory oversight is key, Henry Manne’s “Mergers and the Market for Corporate Control” describes a private or entirely invisible hand mechanism for disciplining managers to work for shareholders. The more underperforming firms have depressed stock prices, the more they become targets for buyouts and restructuring with new management. Funding much of these acquisitions is the private equity industry and its use of leveraged buyouts. Such buyouts concentrate ownership in the hands of private equity managers, and the high amount of leverage they use provides strong incentives for private equity managers to implement beneficial reforms. The expansion of private equity has helped to restructure scores of underperforming firms, has benefited equity and debt investors in this alternative investment space, and has enhanced corporate governance in society. This invisible hand mechanism works well and the recent expansion of control over the private equity industry by the securities and exchange industry is unwarranted.