Corporate ownership of private jets often enhances returns of both public and private firms. But the author argues that the possession of larger private jet fleets in publicly listed firms, relative to the fleets of comparable private firms, is symptomatic of excessive executive perquisites and compensation. Supporting evidence includes reductions in fleet size following leveraged buyouts and 40% smaller fleet sizes among firms owned by private equity funds compared with the fleets of comparable public firms.
What’s Inside?
There are many legitimate reasons for corporate ownership of private jets, and such ownership can enhance shareholder returns in many cases. Even when excessive jet use detracts from shareholder returns, the overall agency cost is still small in relation to firm size. But the author argues that where identified, excessive jet use is symptomatic of wider agency problems that may be harder to pinpoint. The majority of firms show little evidence of excessive jet use, but an economically significant group above the 70th percentile show levels of jet use that are hard to reconcile with shareholder interests.
How Is This Research Useful to Practitioners?
The efficiency with which a firm’s resources are allocated toward maximizing owner returns is one of many variables that are relevant to a firm’s value assessment. Red flags indicating that resources are being diverted toward other goals—for example, excessive managerial enrichment at the expense of capital providers—are widely used to assess the degree to which executive and owner motivations are aligned. In this vein, the author argues that excessive jet use is a symptom of wider agency problems. His evidence indicates that such agency problems are more easily resolved when ownership is concentrated—for example, in a private equity fund rather than dispersed via a public listing.
Investment professionals should pay attention to corporate jet use by the firms they invest in. Seemingly excessive use should be queried and potentially prompt further investigation to determine the extent to which the behavior and actions of executives are aligned with the interests of capital providers.
How Did the Author Conduct This Research?
The author retrieves data from the JETNET database, which tracks the ownership, financing, and operating of business aircraft in the United States. These data allow him to link characteristics of jet ownership, such as fleet size and available seats, with the publicly and privately held firms in the sample. He identifies private firms using the Forbes annual lists of the largest private firms in the United States and public firms using Compustat. He constructs both a cross-sectional sample comparing public and private firms and a sample that records jet ownership of firms prior to, during, and following a leveraged buyout (LBO).
After controlling for other variables, the author uses a least-squares regression model on the cross-sectional data to estimate the linear probability of jet ownership based on whether the firm is publicly listed, owned by a private equity fund, or private (but not privately owned). The results indicate that private equity ownership reduces the probability of corporate jet ownership by around 12 percentage points. For robustness, the author also uses probit models and obtains consistent results. He also finds consistent results when he uses firm ownership variables to model the ratio of jet seats to firm sales.
The author uses regression models to demonstrate that jet ownership declines following LBOs, and his results from quantile regressions indicate that firms in the 80th percentile and above in terms of the ratio of jet seats to sales are most sensitive to their ownership category. Specifically, private equity ownership in the upper quantiles is associated with a lower ratio of seats to sales than is public ownership, whereas private firms that are not private equity owned have the highest ratios of seats to sales.
Abstractor’s Viewpoint
The author convincingly demonstrates that private equity owners value jet use less than do executives of comparable publicly listed firms. In addition, private equity owners have the power to reduce jet use after taking public firms private. Based on this finding, the author argues that excessive jet use may be a proxy for other agency problems. The arguments are intuitively appealing, but the inference is somewhat indirect because it rests on the assumption that private equity owners are correct in their evaluations and because there is little direct evidence that high jet use destroys value. Therefore, caution is required before staking too much on these claims.