What is Opacity Good for? Evidence from Private Equity Deals

Abstract

Using a novel dataset of deal-level private equity data, we document that transparent firms, that is firms that publish financial statements publicly, generate higher returns for investors. In addition, these transparent firms have a higher likelihood of an IPO exit and, conditional on an IPO, take less time to exit. Similarly, transparent deals have greater chances of extremely positive returns (success) and lower chances of significant losses (failure). These findings stand in stark contrast to the widely-held belief that secrecy is a source of competitive advantage within the private equity space. Furthermore, transparent deals are not risky ex post, as the variance of their returns or other performance metrics are similar or even lower than those of other deals. At the fund level, the transparency of portfolio firms is associated with better odds of raising a follow-on fund. These findings are consistent with transparency being an endogenous choice of firms to reduce information asymmetry and expand the pool of potential investors. Transparency is a device that portfolio firms use to signal good prospects, which ultimately results in better returns for private equity funds.

Keywords: Venture Capital, Transparency, Information Asymmetry

JEL Classification: G24