Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts

This paper uses novel data to examine the fleets of corporate jets operated by both publicly traded and privately held firms. In the cross-section, firms owned by private equity funds average 40% smaller fleets than observably similar public firms. Similar fleet reductions are observed within firms that undergo leveraged buyouts. Quantile regressions indicate that these results are driven by firms in the upper 30% of the conditional jet distribution. The results thus suggest that executives in a substantial minority of public firms enjoy excessive perquisite and compensation packages. ∗Federal Reserve Board. Any views expressed here are those of the author and need not represent the views of the Federal Reserve Board or its staff. I thank Bo Becker, Mark Carey, Alex Edmans, Xavier Gabaix, Jerry Hausman, Erik Heitfield, George Korniotis, Amanda Kowalski, David Lebow, Josh Lerner, Raven Saks Molloy, Stew Myers, Matthias Osthoff, Rick Ruback, Johannes Spinnewijn, Julie Wulf, Cam Harvey (the Editor), an anonymous referee, an Associate Editor, and seminar participants at the Federal Reserve Board, Dartmouth Tuck, Harvard Business School, Columbia Business School, Duke Fuqua, the NBER Summer Institute, and the AFA Annual Meeting for helpful comments or conversations. I thank Alejandro Companioni and Geoffrey Barnes for excellent research assistance. I am responsible for any errors. Managers of a firm might sometimes take actions to benefit themselves at the expense of the firm’s investors. Both firms and governments have put in place a variety of mechanisms to mitigate this agency problem, and a great deal of research in corporate finance has been devoted to their study. Nonetheless, there remains considerable debate as to whether further action should be taken to protect outside investors from self-interested managers. Debate over the desirability of reforming executive compensation arrangements is especially active. Some argue that executives exert too much control over their own compensation and often choose to pay themselves excessively (Yermack (1997), Bebchuk and Fried (2006), Morse, Nanda, and Seru (2011)), while others argue that observed compensation arrangements could represent optimal contracts negotiated at arm’s length between firms and valuable executive talent (Himmelberg and Hubbard (2000), Edmans, Gabaix, and Landier (2009), Gayle and Miller (2009), Kaplan and Rauh (2010)). Given this mixed evidence, it is not surprising that controversy has surrounded recent attempts by policymakers to mandate more shareholder influence over compensation and other corporate affairs through initiatives like “say-on-pay” and proxy access. This paper brings new evidence to these debates by measuring a particular kind of firm behavior where there is potential for managerial abuse—the use of corporate jets. Executives in many firms travel on jets or other aircraft that are owned or leased by their employers. Much of this activity is likely perfectly consistent with the maximization of shareholder value. For example, private jets might save many hours of executives’ valuable time, and they might serve as an efficient form of compensation. It is also possible, however, that executives could overconsume corporate jets if shareholders are unable to monitor or incentivize them properly. Jet use itself can be costly—annual operating costs can be as high as $5 million per jet, with $1 million being quite typical—but these amounts are not especially large when compared to revenues or profits earned by the firms studied in this paper. The most important reason to study jet fleets is that any observable waste could represent the tip of