Horse Picker or Right Jockey? An Examination of Private Equity Value Creation Through the Lens of Withdrawn Leveraged Buyouts

Posted: 18 Dec 2014

See all articles by Ping Liu

Ping Liu

Krannert School of Management, Purdue University

Date Written: May 1, 2014

Abstract

This paper examines the consequences of leveraged buyout (LBO) transactions through the lens of subsequently withdrawn transactions. Using the reason for LBO withdrawal and the unfavorable credit market movements during the period when the deal is in play to address the endogenous withdrawal decision, I create a sample of LBOs withdrawn for reasons not related to target firm fundamentals. This paper documents the following facts. First, target firms of failed LBO transactions experience upward revaluation by the stock market. Such results are stronger for target firms with more information asymmetry problems. The evidence in my paper indicates that private equity investors are able to identify undervalued firms in the stock market. Second, I document improvements in operating performance of firms after LBO transactions compared to target firms that fail to go through the LBO process. Third, private equity investors adjust the capital structure of target firms to exploit the tax benefit of interest deductions. Fourth, private equity investors also tend to reshuffle the management of target firms shortly after the LBO transactions. Overall, the evidence suggests that private equity creates value by exploiting the undervaluation of target firms, and also by improving their operational performance and financial structure.

Keywords: LBO, Private equity, Undervaluation

JEL Classification: G24, G30, G31, G32, G34

Suggested Citation

Liu, Ping, Horse Picker or Right Jockey? An Examination of Private Equity Value Creation Through the Lens of Withdrawn Leveraged Buyouts (May 1, 2014). Available at SSRN: https://ssrn.com/abstract=2435721

Ping Liu (Contact Author)

Krannert School of Management, Purdue University ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
7654944691 (Phone)

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