Information Handling and Firm Performance: Evidence from Reverse LBOs, Volume 21, Issue 4
National Bureau of Economic Research, 1991 - Capital market - 36 pages
We investigate the transition from private to public ownership of companies that had previously been subject to leveraged buyouts. As they go to the public markets for equity, such firms face an information asymmetry problem. Behavioral effects are also likely to be at work. We show that the combination of informational and behavioral effects will cause firms to handle information in particular ways, leading to an equilibrium pattern in which disappointing performance after the initial public offering should be expected. We find empirical support for this theory by studying 62 reverse LBOs that went public between 1983 and 1987. There is strong evidence that the performance of the reverse LBOs before going public overestimates their likely performance after the initial public offering. The market appears to anticipate this pattern.
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62 reverse LBOs Andrei Shleifer AOI/AT behavioral effects Bureau of Economic buyers comparison firms control firms corporate cutoff curve Descriptive statistics disappointing performance disposition effect Economic Research end of period equilibrium equity EVIDENCE FROM REVERSE expected per-period earnings expected value Financial Economics FIRM PERFORMANCE firms on average fooled four-digit SIC code Francois Degeorge Richard Glenn Hubbard go public HANDLING AND FIRM hidden information hypothesis incentives indicates inflate INFORMATION HANDLING informational effects initial public offering investment investors Journal of Finance LBO specialists leveraged buyouts manager sells market pays matched firm median max myopia National Bureau Number operating performance p-value performance improvement performance of reverse post-IPO pre-IPO performance pre-offering private to public prospect theory public ownership publicly offered commodity regression Rentzler reverse LBOs perform Robert sellers sells in period signed-rank test similar performance stock price performance studies suggest transition from private two-tailed test underpricing Wilcoxon matched-pairs Wilcoxon signed-rank test