RE­SEARCH: The im­pa­ct of ow­ners­hip com­pe­ten­ce on transa­ction costs of li­sted firms: The case of pri­va­te equi­ty ow­ners­hip in emer­ging mar­kets

We highlight new research by Trond Randøy, Bruce Hearn, Collins Ntim, Ven Tauringana, John Malagila and Lars Oxelheim examining how private equity ownership affects transaction costs of share trading in emerging economies.

The paper was awarded Best Paper in the Corporate Governance, Accounting and Finance track at the 51st European International Business Conference, held in Athens in December 2024. 

Using unique firm-level data from eight Caribbean stock exchanges, the study offers new insights into the interaction between private equity ownership, corporate governance, and market liquidity in institutionally complex environments.

Abstract

Private equity is often associated with improved governance, enhanced monitoring, and increased liquidity of stocks in developed markets. However, far less is known about its effects in emerging economies characterised by institutional voids and dense network-based governance.

This study examines how private equity ownership affects transaction costs of share trading of stocks in such settings. Analysing listed firms across eight Caribbean stock exchanges, the findings show that higher private equity ownership is associated with wider bid–ask spreads, indicating higher transaction costs. This is the opposite result of what is known about listed firms in developed economies. However, this effect is significantly reduced when firms adopt shareholder-oriented governance practices or maintain related entities in offshore financial centres. The results highlight the importance of institutional and governance fit for the effectiveness of private equity in emerging markets.

Key findings

• Private equity and transaction costs: Higher private equity ownership is associated with higher transaction cost of share trading in emerging economies, making private equity investors less attractive to third party investors.
• Corporate governance: Shareholder friendly corporate governance to the negative impact from private equity ownership.
• Ownership competencies: Private equity effectiveness depends on a good alignment between owner competencies and the institutional context.
• Context-specific governance: Private equity models from developed economies require governance adaptation to function effectively in emerging markets.