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The likelihood of management involvement, offer premiums, and target shareholder wealth effects: Evidence from the 2002–2007 LBO wave

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  • Cao, Kien
  • Coy, Jeffrey
  • Nguyen, Thuy

Abstract

This study analyzes the likelihood of management's involvement, the determinants of the offer premium and the market's reaction to the target in order to evaluate the pervasiveness of the agency cost motive and the information asymmetry motive in LBO transactions in the most recent LBO wave. In addition, we consider the role that market volatility plays in the key elements of LBOs. There is strong evidence to suggest that market volatility plays an important role in determining all three elements under investigation due to its effect on the market value of the firm. In addition, management's involvement has a strong positive effect on offer premiums indicating that positive information asymmetry remains to be a motive for management's involvement in LBOs. The agency cost hypothesis is also supported in all three analyses and there is evidence that increased financial distress costs are a concern to private equity groups.

Suggested Citation

  • Cao, Kien & Coy, Jeffrey & Nguyen, Thuy, 2016. "The likelihood of management involvement, offer premiums, and target shareholder wealth effects: Evidence from the 2002–2007 LBO wave," Research in International Business and Finance, Elsevier, vol. 36(C), pages 641-655.
    • Handle: RePEc:eee:riibaf:v:36:y:2016:i:c:p:641-655
    DOI: 10.1016/j.ribaf.2015.01.002
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    Cited by:

    1. Dasilas, Apostolos & Leventis, Stergios, 2018. "The performance of European equity carve-outs," Journal of Financial Stability, Elsevier, vol. 34(C), pages 121-135.
    2. Hammer, Benjamin & Mettner, Sven & Schweizer, Denis & Wünsche, Norbert, 2023. "Management buyouts in times of economic policy uncertainty," Finance Research Letters, Elsevier, vol. 52(C).
    3. Paulo P. Alves & M. Ricardo Cunha & Luís K. Pacheco & João M. Pinto, 2022. "How Banks Price Loans for LBOs: an Empirical Analysis of Spread Determinants ," Journal of Financial Services Research, Springer;Western Finance Association, vol. 62(3), pages 163-200, December.
    4. Mittoo, Usha & Ng, Dennis & Yan, Meng, 2020. "Managerial ownership, credit market conditions, undervaluation and offer premiums in management (MBOs) and leveraged buyouts (LBOs)," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    5. Dasilas, Apostolos & Grose, Chris, 2018. "The wealth effects of public-to-private LBOs: Evidence from Europe," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 179-194.

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    More about this item

    Keywords

    Leveraged buyout; Management buyout; Agency cost hypothesis; Information asymmetry hypothesis; Offer premiums; Market volatility;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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