Private equity has reaped large rewards in recent years. We claim that one major reason for this success is due to the corporate governance advantages of private equity over those of the public corporation. We argue that the development and trade of substantial derivative contracts have significantly weakened the governance of public corporations and have created a need for financially sophisticated directors and much closer supervision of management. The private-equity model delivers these benefits and allows corporations to be better governed, creating large wealth gains for investors.

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