Access Type

Open Access Dissertation

Date of Award

January 2011

Degree Type

Dissertation

Degree Name

Ph.D.

Department

Finance

First Advisor

Sudip Datta

Abstract

ABSTRACT

ESSAYS ON REVERSE LEVERAGED BUYOUTS

by

MARK GRUSKIN

August 2011

Advisor: Dr. Sudip Datta

Major: Business Administration (Finance)

Degree: Doctor of Philosophy

This dissertation is the first study to investigate public-to-private reverse leveraged buyouts (RLBOs). The first essay measures changes in profitability, financial structure, operations, and cost structure to detect actions taken during the private period. Results show that approaching the leveraged buyout there is an above industry level of free cash flow and capital expenditures, while growth options are at competitive levels. These factors in the presence of low ownership concentration suggest the existence of overinvestment.

Increased leverage in the private period leads to significant declines in free cash flow and capital expenditures, while ownership concentration increases, which I contend incentivizes management to avoid overinvestment. I find that private period restructuring that improves growth and reduces cost structure leads to superior post-RLBO valuations. Further, even though free cash flow increases as leverage decreases, management retains the discipline to invest in projects that generate positive future cash flows.

The second essay investigates long-run stock returns of public-to-private RLBOs. First, I examine whether RLBOs suffer from the same long-run underperformance characteristic of IPOs. Then, following up on the results in Chapter 2 that identifies the determinants of post-RLBO valuation, I investigate what firm characteristics are related to stock returns after the offering. Finally, I investigate whether underwriters perform the certification role found for first IPOs.

The findings demonstrate that public-to-private RLBOs earns stock returns that outperform IPOs in comparable industries, with little evidence of market mispricing. As these RLBOs were previously exchange listed, I argue that reduced information asymmetry ameliorates the underperformance found for IPOs. The evidence suggests that restructuring that creates growth has the same beneficial impact on stock performance as for valuation. I also find that private period actions that reduce cost structure lead to positive stock returns after the RLBO.

I find that executive committees of the board of directors are discounted by the market, leading to lower stock returns. Further, underwriter quality of RLBOs is generally higher than that of IPOs, and is positively correlated with stock performance. Public offerings by higher quality underwriters earn positive abnormal stock returns over long horizons.

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