Could Private Equity Replace the Stock Market
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Could Early-Stage Private Equity Takeovers
Prevent Enron-Type Scandals?
Reflection Paper on Enron: The Smartest Guys in the Room
1. Introduction – Agency Costs and the “Efficient Capital Markets” Delusion
Everyone captured, agency problem, ECMH obviously not working, company relying on traders and spvs to make money bc other branches not working, needed to show short-term profits to investors
2. How Private Deals (Can) Lead to More Information and Better Monitoring
PE = access to executives and would have studied financial statements (largely ignored in real life, except by WSJ etc à so information was not completely hidden). Conclusion: stock market actually inefficient, other sources of financing available. But small investors: how to invest? Cant speculate – actually good for society in general (social welfare)? Could invest in PE stock and securitized derivatives based on high-yield bonds providing financing to company and be traded on public markets. Smaller gains by individual investors? Maybe bigger gains bc PE makes firms more efficient actually? PE/access to information = true strong-form capital market?
Cf. Economics Nobel Prize winners: Efficient Capital Markets Hypothesis. Only 3% of professional fund managers managed to make a profit over a number of years. Trading stock in general is a losing proposition ANYWAY
Potential value: based on expected profits/dividends/capital gains (Enron proof that capital markets not able to assess if agency fails)
Kaplan papers re long term