Do Insiders Time Management Buyouts and Freezeouts to Buy Undervalued Targets?

79 Pages Posted: 5 Jun 2016 Last revised: 10 Sep 2018

See all articles by Jarrad Harford

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Jared R. Stanfield

University of Oklahoma; Financial Research Network (FIRN)

Feng Zhang

Southern Methodist University (SMU) - Finance Department

Date Written: July 1, 2018

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.

Keywords: management buyouts, freezeout acquisitions, market timing, conflicts of interest

JEL Classification: G14, G34

Suggested Citation

Harford, Jarrad and Stanfield, Jared R. and Zhang, Feng, Do Insiders Time Management Buyouts and Freezeouts to Buy Undervalued Targets? (July 1, 2018). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2789893 or http://dx.doi.org/10.2139/ssrn.2789893

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jared R. Stanfield (Contact Author)

University of Oklahoma ( email )

Norman, OK 73019
United States

HOME PAGE: http://jaredstanfield.com

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Feng Zhang

Southern Methodist University (SMU) - Finance Department ( email )

SMU Cox School of Business
6212 Bishop Blvd
Dallas, TX 75275
United States

HOME PAGE: http://https://sites.google.com/view/fengzhangfin

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