Does Going Private Add Value Through Operating Improvements?

Previous studies documented a large positive effect of private equity ownership on operating performance between 1980 and 1990, while more recent studies such as Guo, Hotchkiss and Song (2011) and Cohn, Mills and Towery (2014) document none or a very modest increase in operating performance. We revisit the evidence on post LBO performance and offer an alternative explanation for the varied and time-inconsistent results found in the literature: The effect of accounting for LBO transactions and its change over time. Using hand-collected financial statements for 183 LBO targets, we illustrate how previously used proxies for operating performance fail to consider all of the accounting changes, accompanying these complex transactions. Next, we reproduce the results of previous studies. However, once proxies are modified slightly to account for the LBO process, we find no robust evidence of post-buyout improvements compared to industry peers, regardless of the time period of the study. Finally, we document the change in accounting practices over time and find that it coincides with the decline in operating performance as measured with traditional proxies