Reverse‐LBOs, re‐LBOs and informational asymmetry hypothesis of LBO transactions

Abstract

Purpose

The purpose of this paper is to examine the informational asymmetry (informational advantage of managers) in leveraged buyout (LBO) transactions.

Design/methodology/approach

Unlike previous studies of informational asymmetry in LBOs, this research uses a set of reverse‐LBO and re‐LBO firms. The paper proposes and empirically tests three hypotheses that draw on the informational advantage of managers in LBOs. Specifically, the value gain (VG) realized by the reverse‐LBO firms is compared with that realized by a control sample of firms; the wealth distribution between managers and pre‐buyout shareholders is studied; and, finally, the performance of re‐LBO firms relative to reverse‐LBO firms is evaluated.

Findings

The results do not support the view that managers use buyouts to exploit their informational advantage. Specifically; the performance of LBO firms under the private ownership is comparable to those of matching public firms; the management team's return in a LBO deal is not significantly more than pre‐buyout shareholders’ return; and repeating reverse‐LBO firms (re‐LBOs) do not necessarily perform better than the non‐repeating reverse‐LBO firms.

Originality/value

While reverse‐LBOs have been investigated to some extent in the prior literature, studies on re‐LBOs are quite scant – although these transactions offer a new and interesting avenue to examine the motivations behind LBOs in general. The use of the entire LBO − reverse‐LBO − re‐LBO cycle in testing the informational advantage of managers is a novelty. It is hoped that re‐LBOs will attract the amount of attention they deserve as these firms may offer interesting means to reinvestigate commonly debated theories of corporate finance.

Citation

Kosedag, A., Mehran, J. and Qian, J. (2009), "Reverse‐LBOs, re‐LBOs and informational asymmetry hypothesis of LBO transactions", Managerial Finance, Vol. 35 No. 8, pp. 716-728. https://doi.org/10.1108/03074350910967259