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Do insiders time management buyouts and freezeouts to buy undervalued targets?

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  • Harford, Jarrad
  • Stanfield, Jared
  • Zhang, Feng

Abstract

We provide evidence that managers and controlling shareholders time management buyouts (MBOs) and freezeout transactions to take advantage of industry-wide undervaluation. Portfolios of industry peers of MBO and freezeout targets show significant alphas of around 1% per month over the 12-month period following the transaction. These returns are not explained by a battery of risk factors or empirical methodologies, but exhibit significant heterogeneity across deals. Additional tests show that, on average, abnormal returns to industry peers are a reliable proxy for those to the target firm. Further, MBOs and freezeouts are announced during troughs of industry profitability.

Suggested Citation

  • Harford, Jarrad & Stanfield, Jared & Zhang, Feng, 2019. "Do insiders time management buyouts and freezeouts to buy undervalued targets?," Journal of Financial Economics, Elsevier, vol. 131(1), pages 206-231.
    • Handle: RePEc:eee:jfinec:v:131:y:2019:i:1:p:206-231
    DOI: 10.1016/j.jfineco.2017.12.010
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    1. Derrien, François & Frésard, Laurent & Slabik, Victoria & Valta, Philip, 2023. "Industry asset revaluations around public and private acquisitions," Journal of Financial Economics, Elsevier, vol. 147(1), pages 243-269.
    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).

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    More about this item

    Keywords

    Management buyouts; Freezeout acquisitions; Market timing; Conflicts of interest;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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