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

Author

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  • Arman Kosedag
  • Jamshid Mehran
  • Jinhu Qian

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.

Suggested Citation

  • Arman Kosedag & Jamshid Mehran & Jinhu Qian, 2009. "Reverse-LBOs, re-LBOs and informational asymmetry hypothesis of LBO transactions," Managerial Finance, Emerald Group Publishing, vol. 35(8), pages 716-728, July.
  • Handle: RePEc:eme:mfipps:v:35:y:2009:i:8:p:716-728
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    References listed on IDEAS

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    2. Reddy, Kotapati Srinivasa, 2016. "Turnaround or Contract Merger: A conceptual model to protect sick and government companies," MPRA Paper 74263, University Library of Munich, Germany, revised 2016.
    3. Mindaugas Laužikas & Antanas Krasauskas, 2013. "Impacts of sustainable structural growth on the economic performance of listed companies," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 1(2), pages 81-91, December.

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    Keywords

    Leveraged buy-outs; Managers;

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