Work

Dynamic Contracting with Intermediation: Operational, Governance, and Financial Engineering

Year: 2023

Type: article

Abstract: ABSTRACT Private equity funds intermediate investment and affect portfolio firm performance by actively engaging in operational, governance, and financial engineering. We study this type of intermediation in a dynamic agency model in which an active intermediary raises funds from outside investors and invests in a firm run by an agent. Optimal contracting addresses moral hazard at the intermediary and firm levels. The intermediary's incentives to affect firm performance are strongest after poor performance, while the agent's incentives are strongest after good performance. We also show how financial engineering, that is, financial contracting with outside investors, interacts with operational and governance engineering.

Source: The Journal of Finance

DOI: 10.1111/jofi.13265

Authors: SEBASTIAN GRYGLEWICZ, SIMON MAYER

Institutions: University of Piraeus, Copenhagen Business School, École Polytechnique Fédérale de Lausanne, Carnegie Mellon University, Erasmus University Rotterdam

Language: English

Topic: Private Equity and Venture Capital

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $4,020

Funder: University of Washington