Maria-Teresa Marchica

Returns and Risks to Private Equity

We assess returns and risks to private equity investors from 35 countries for the time interval of 1996-2008. We find that returns to private equity (measured as return on book equity (ROE)) are significantly higher than ROEs to publicly traded equity. Using customary measures to adjust for risk, the spread between private and public equity returns is sufficiently high to justify the idiosyncratic risk borne by undiversified private equity investors. Despite their apparently high undiversified portfolio risk, investors in non-publicly traded firms appear to allocate their capital efficiently.

Corporate Debt Maturity and Monitoring by Institutional Investors

I provide novel evidence that institutional investors, by influencing the maturity structure of corporate debt, play an active monitoring role. First, I find that institutional ownership is positively related to short-term debt and this relationship is not only statistically significant, but also economically sizeable. Second, I show that longer investment horizons and absence of potential business relations with the firm provide investors with stronger incentives to monitor managers by increasing the proportion of short-term debt in the company. This monitoring role is corroborated by robustness tests which reveal an increased probability of issuing short-term debt following a change in investor characteristics.