Efficiency and Organizational Structure: A Study of Reverse LBOs

Abstract

This paper is a report on 72 firms which went public since 1983 but previously underwent a full or divisional LBO. Accounting measures of performance reveal significant improvements in profitability which resulted mainly from these firms' ability to reduce costs. Firms experience dramatic increases in leverage at the LBO, but the leverage ratios are gradually reduced. The evidence is consistent with the hypothesis that the change in the governance structure of these firms towards more concentrated residual claims created a new organizational structure which is more efficient than its predecessor.

Managerial Incentives and Value Creation: Evidence from Private Equity

“…16 Our approach is consistent with Kaplan (1989a) and Muscarella and Vetsuypens (1990) who also use the fraction of equity as the measure of managerial incentives.…”

“…It is common in the literature on private equity to propose that enhanced managerial incentives are a major driver of value creation. However, we are unaware of any paper that provides a description of what "enhanced managerial incentives" entail, other than the evidence provided by Kaplan (1989a) and Muscarella and Vetsuypens (1990), showing that the fraction of equity owned by the CEO tends to increase. While this is an important feature (which we also examine), the interviews we summarize below clearly indicate that increasing CEO equity is one piece of a more complex set of changes.…”

“…Post-buyout information is only available for firms with publicly traded debt, outstanding preferred stock or publicly traded equity, leading to a small sample size (48 firms) and possible selection concerns. Muscarella and Vetsuypens (1990) utilize panel data covering periods during and after PE ownership, relying on reverse-LBOs, in their analysis of differences in managerial incentives between the PE-owned period and post-IPO. There are 72 firms in their sample.…”

“…Hence, holding the fraction of equity owned by the 15 Kaplan (1989a) and Muscarella and Vetsuypens (1990) do not include options in their analysis of CEO equity ownership in LBOs. Options were less common in compensation packages in the 1980s than in recent times, so this was a less important issue for their samples.…”

“…Kaplan (1989a) first documented differences in the share of CEO equity ownership between publicly traded firms and firms that had undergone a management buyout. Muscarella and Vetsuypens (1990) provide a similar analysis and Baker and Wruck (1989) provide a detailed case study, but no prior study has examined managerial ownership in post-1990 buyouts, as we do here. 2 It is important to examine more recent data for a couple of reasons.…”