Financial and stock market variables as predictors of management buyouts

Abstract

This paper investigates whether publicly held firms which change to private ownership through management buyouts (ex‐public firms) possess characteristics prior to the change which differentiate them from firms which remain publicly owned. The financial characteristics of ex‐public firms for the year immediately prior to going private were analyzed. A multivariate framework was developed to determine which attributes best distinguished firms going private via management buyouts from similar firms not going private. A discriminant function was developed using seven ratios: (1) concentration of ownership, (2) cash flow to net worth, (3) cash flow to total assets, (4) price/earnings ratio, (5) price/book value ratio, (6) book value of depreciable assets in relation to original costs, and (7) dividend yield. The model demonstrated a classification accuracy of 77.8 percent for the original sample and 81.4 percent in a hold‐out sample validation. These findings imply that financial characteristics alone provide a means by which firms going private via management buyouts can be separated from others. Therefore one can argue that, regardless of the stated motive for going private, financial characteristics either are explicit decision variables or directly reflect non‐financial reasons for management buyouts.

Undervaluation, private information, agency costs and the decision to go private

“…Existing shareholders will only sell if offered more than the current market price for their shares and hence there is a financial incentive to accept a bid. Evidence of higher board shareholdings in firms going private was found by Maupin (1987) and Halpern et al (1999). This reasoning may also apply to institutional shareholdings.…”

“…Third, in relation to potential tax advantages, Maupin (1987) found firms going private would benefit from significant tax savings generated from the increased depreciation write-offs. Another potential source of tax savings is from the increase in debt used to partly finance the deal (Kaplan, 1989).…”

Economic Consequences of Private Equity Investments on the German Stock Market

“…Alternatively, higher managerial shareholdings create greater financial incentives to pursue wealth maximising policies because it reduces the incentive to shirk, Weir and Laing (1998). Support for this comes from Maupin (1987) who found that management buyouts (MBOs) had higher managerial shareholdings. Renneboog, Simons and Wright (2005) find the wealth effects in UK public to private transaction are negatively related to managerial ownership.…”

The firm lifecycle as a determiant of going private decisions

“…Palepu, 1982;Powell, 2004;Sorensen, 2000;Stevens, 1973;Tsagkanos, 2008;Weir, Laing, & Wright, n.d.;Wi Saeng Kim & Lyn, 1991) show that target firms are different from acquiring firms, target firms or nontarget firms, and that acquirers, target, and non-targets have particular differing firm characteristics (Gutsche, 2013). Moreover, similar differences between going-private and non-going private firms have been identified in the literature that analyzes the relative firm characteristics of going private firms (shortly before the going private transaction) and a non-going private control group (Boot, Gopalan, & Thakor, 2008;Gleason, Payne, & Wiggenhorn, 2007;Halpern, Kieschnick, & Rotenberg, 1999;Kieschnick, 1998;Lehn & Poulsen, 1989;Loh, 1992;Maupin, 1987).…”

“…G. Palepu, 1986). This implies that target firms are less profitable than non-target firms and may imply for going private firms a negative relationship between going private firms and non-going private firms (Maupin, 1984(Maupin, , 1987.…”