The Effects of LBO Events on Industry Rivals

40 Pages Posted: 21 Feb 2011 Last revised: 2 Oct 2011

See all articles by Jeffrey Oxman

Jeffrey Oxman

University of St. Thomas

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: September 1, 2011

Abstract

The rivals of LBO targets experience an abnormal return on equity of 1.2% in the seven day window surrounding the LBO announcement. There are three hypotheses that may explain the wealth effects: the Pure Acquisition Hypothesis, the Competition Dynamics Hypothesis, and the Private Information Hypothesis. Our analysis provides the most support for the Pure Acquisition Hypothesis, which attributes the wealth effect to the increased probability of the rival firm receiving an LBO offer. We also find support for a version of the Private Information Hypothesis, if the private information is considered to be a general undervaluation of firms in the industry. There is comparatively little support for the Competition Dynamics Hypothesis. This is the first paper to test all three of these hypotheses in the same framework, and updates the existing literature on the subject for the second LBO wave of the late 1990s and 2000s.

Keywords: Company finance, Corporate investment, Leveraged buyouts, Firm behavior

JEL Classification: G31, G32, G34, L22

Suggested Citation

Oxman, Jeffrey and Yildirim, Yildiray, The Effects of LBO Events on Industry Rivals (September 1, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1763913 or http://dx.doi.org/10.2139/ssrn.1763913

Jeffrey Oxman (Contact Author)

University of St. Thomas ( email )

1000 LaSalle Ave.
Minneapolis, MN 55403
United States

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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