Reverse-LBOs, re-LBOs and informational asymmetry hypothesis of LBO transactions

Purpose -The purpose of this paper is to examine the informational asymmetry (informational advantage of managers) in leveraged buyout (LBO) transactions. Design/methodology/approach -Unlike previous studies of informational asymmetry in LBOs, this research uses a set of reverse-LBO and re-LBO firms. The paper proposes and empirically tests three hypotheses that draw on the informational advantage of managers in LBOs. Specifically, the value gain (VG) realized by the reverse-LBO firms is compared with that realized by a control sample of firms; the wealth distribution between managers and pre-buyout shareholders is studied; and, finally, the performance of re-LBO firms relative to reverse-LBO firms is evaluated. Findings -The results do not support the view that managers use buyouts to exploit their informational advantage. Specifically; the performance of LBO firms under the private ownership is comparable to those of matching public firms; the management team's return in a LBO deal is not significantly more than pre-buyout shareholders’ return; and repeating reverse-LBO firms (re-LBOs) do not necessarily perform better than the non-repeating reverse-LBO firms. Originality/value -While reverse-LBOs have been investigated to some extent in the prior literature, studies on re-LBOs are quite scant – although these transactions offer a new and interesting avenue to examine the motivations behind LBOs in general. The use of the entire LBO?-?reverse-LBO?-?re-LBO cycle in testing the informational advantage of managers is a novelty. It is hoped that re-LBOs will attract the amount of attention they deserve as these firms may offer interesting means to reinvestigate commonly debated theories of corporate finance.