Does Going Private Add Value Through Operating Improvements?

53 Pages Posted: 12 Sep 2013 Last revised: 14 Oct 2017

See all articles by Brian Ayash

Brian Ayash

California State Polytechnic University, San Luis Obispo - Finance Area

Harm H. Schütt

Tilburg University - Tilburg School of Economics and Management

Date Written: March 30, 2016

Abstract

Previous studies documented a large positive effect of private equity ownership on operating performance between 1980 and 1990, while more recent studies such as Guo, Hotchkiss and Song (2011) and Cohn, Mills and Towery (2014) document none or a very modest increase in operating performance. We revisit the evidence on post LBO performance and offer an alternative explanation for the varied and time-inconsistent results found in the literature: The effect of accounting for LBO transactions and its change over time. Using hand-collected financial statements for 183 LBO targets, we illustrate how previously used proxies for operating performance fail to consider all of the accounting changes, accompanying these complex transactions. Next, we reproduce the results of previous studies. However, once proxies are modified slightly to account for the LBO process, we find no robust evidence of post-buyout improvements compared to industry peers, regardless of the time period of the study. Finally, we document the change in accounting practices over time and find that it coincides with the decline in operating performance as measured with traditional proxies.

Keywords: leveraged buyouts, financial analysis, private equity

JEL Classification: G32, G33, G34, H25

Suggested Citation

Ayash, Brian and Schütt, Harm H., Does Going Private Add Value Through Operating Improvements? (March 30, 2016). Journal of Corporate Finance, Vol. 40, 2016. Available at SSRN: https://ssrn.com/abstract=2265066 or http://dx.doi.org/10.2139/ssrn.2265066

Brian Ayash

California State Polytechnic University, San Luis Obispo - Finance Area ( email )

College of Business
San Luis Obispo, CA 93407
United States

Harm H. Schütt (Contact Author)

Tilburg University - Tilburg School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

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