Sheds new light on the impact of private equity

Fay Høyfjell is one of this year’s winners of the Argentum Award 2019. She won the award together with Tine Qun Tungland. Photo: Argentum

The master’s thesis and winner of this year’s Argentum Award shows that private equity ownership has a disciplining effect on portfolio companies.

Each year, Argentum hands out an award for the best master’s thesis within private equity in the Nordics, with a prize of NOK 20.000. With the thesis, “Private equity and real earnings management: A disciplining effect,” the Norwegian duo Fay Høyfjell and Tine Qun Tungland won the award.

– From the outside, private equity can seem quite closed, which makes it easy to get a negative impression. We were surprised by our findings which changed our perspective of the industry. Easily put, we find that PE funds care about improving the quality of portfolio companies, not only making a profit out of the ownership, Høyfjell says.

The master’s thesis uses Norwegian finance records to investigate the amount of real earnings management (REM) in the portfolio companies of PE funds. REM occur when companies make operational changes to appear more attractive for stakeholders.

– Oftentimes, companies stop to invest in R&D, increase sales by giving large discounts, and have an overproduction to disperse the fixed costs. In others words they seek to appear as being more profitable, Høyfjell says.

– The thesis provides an important insight into reporting into PE by looking at how much earnings management happens in PE owned companies. Understanding how PE ownerships affects earnings management is an under-researched area and this thesis is one of the few to investigate this topic, it says in the jury justification.

PE has “disciplining” effect

Høyfjell and Tungland compared the amount of REM in portfolio companies and comparable private and publicly listed companies. They found empirical evidence that portfolio companies carry out less REM than private companies.

– Hence, private equity seems to have a disciplining effect on portfolio companies, which become a better version of themselves than if they “only” were a private company. Our analysis is that PE ownership seem to be educational for the portfolio companies; their operation is done in a more correct manner because attentive, professional owners bring their insights into managing a company, Høyfjell says.

The occurrence of REM can hurt a company long-term, which is why knowledge about private equity’s influence is of large value. There was not a clear difference between portfolio companies and publicly listed companies on this matter.

Considering the industry

The duo wrote their master’s thesis in the spring of 2018 as part of their master’s degree in economic analysis at NHH – Norwegian Business School. They did not know each other before writing the thesis, but both wanted to write about how start-ups are financed. The worked with the assumption that appearance would be higher in PE-owned companies and publicly listed companies and were surprised that their analysis showed the opposite. Then they came over issues around accounting manipulation, which they wanted to test out.

– It was great to share the workload. We have made manual searches of PE acquisitions by using accounting numbers from 1992 to 2015, which is impossible to go through alone. It was also indispensable to always have someone that knew the thesis just as well, and to be sparring partners when analyzing the findings, the winners say.

Tungland is currently finishing a double degree in Australia and is employed in EY’s Transaction Advisory Services from this fall. Høyfjell is working in Sherpa by Atea as a Business Intelligence Consultant, but could be interested in switching over to private equity in the future:

– I would absolutely consider that. It is an industry that’s growing, and it allows you to work with companies and shape them. Also, from a women’s perspective, private equity seems more tempting than traditional finance jobs, she says.


Argentum want to thank all the contestants that applied for the Argentum Award 2019. We also want to congratulate this year’s winners, Fay and Tine, with the award.

Read more about Argentum’s annual master’s thesis award here.