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Information Handling and Firm Performance: Evidence from Reverse LBOs

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Author Info
Francois Degeorge
Richard Zeckhauser

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Abstract

We investigate the transition from private to public ownership of companies that had previously been subject to leveraged buyouts. As they go to the public markets for equity, such firms face an information asymmetry problem. Behavioral effects are also likely to be at work. We show that the combination of informational and behavioral effects will cause firms to handle information in particular ways, leading to an equilibrium pattern in which disappointing performance after the initial public offering should be expected. We find empirical support for this theory by studying 62 reverse LBOs that went public between 1983 and 1987. There is strong evidence that the performance of the reverse LBOs before going public overestimates their likely performance after the initial public offering. The market appears to anticipate this pattern.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3798.

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Date of creation: Aug 1991
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Handle: RePEc:nbr:nberwo:3798

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Elton, Edwin J & Gruber, Martin J & Rentzler, Joel, 1989. "New Public Offerings, Information, and Investor Rationality: The Case of Publicly Offered Commodity Funds," Journal of Business, University of Chicago Press, vol. 62(1), pages 1-15, January. [Downloadable!] (restricted)
  2. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July. [Downloadable!] (restricted)
  3. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March. [Downloadable!] (restricted)
  4. Ferris, Stephen P & Haugen, Robert A & Makhija, Anil K, 1988. " Predicting Contemporary Volume with Historic Volume at Differential Price Levels: Evidence Supporting the Disposition Effect," Journal of Finance, American Finance Association, vol. 43(3), pages 677-97, July. [Downloadable!] (restricted)
  5. Lehn, Kenneth & Poulsen, Annette, 1989. " Free Cash Flow and Stockholder Gains in Going Private Transactions," Journal of Finance, American Finance Association, vol. 44(3), pages 771-87, July. [Downloadable!] (restricted)
  6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  7. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August. [Downloadable!] (restricted)
  8. Smith, Abbie J., 1990. "Corporate ownership structure and performance *1: The case of management buyouts," Journal of Financial Economics, Elsevier, vol. 27(1), pages 143-164, September. [Downloadable!] (restricted)
  9. Richard J. Zeckhauser & John Pound, 1990. "Are Large Shareholders Effective Monitors? An Investigation of Share Ownership and Corporate Performance," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 149-180 National Bureau of Economic Research, Inc.
  10. Elton, Edwin J & Gruber, Martin J & Rentzler, Joel C, 1987. "Professionally Managed, Publicly Traded Commodity Funds," Journal of Business, University of Chicago Press, vol. 60(2), pages 175-99, April. [Downloadable!] (restricted)
  11. Muscarella, Chris J & Vetsuypens, Michael R, 1990. " Efficiency and Organizational Structure: A Study of Reverse LBOs," Journal of Finance, American Finance Association, vol. 45(5), pages 1389-1413, December. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David A. Butz, 1993. "Debt Financing and Manager-Shareholder Agency Costs," UCLA Economics Working Papers 687, UCLA Department of Economics. [Downloadable!]
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