A Comparison of Reverse Leveraged Buyouts and Original Initial Public Offers : Factors Impacting Their Issuance in the IPO Market

The purpose of this paper is to assess the factors that affect the returns earned by investors in early trading of reverse LBOs and compare those results to factors affecting original IPOs which are matched by size, industry, and issue date. A mean excess return of 7.64% is observed for the sample of reverse LBOs during the period 1987 to 1998. This return is uniformly lower than returns earned by investing in original IPOs. These results support the information asymmetry hypothesis. The results also show that factors such as number of months the LBO was privately held, the over-allotment, or greenshoe option, the size of the issue, insider ownership, and gross spread impact the returns earned by investors in reverse LBOs. We find that the level of insider participation and the over-allotment option are more important to original IPOs than to reverse LBOs in explaining the excess returns earned by shareholders in early trading. We find, however, that the size of the offering has more impact on excess returns for reverse LBOs than for original IPOs