Information Handling and Firm Performance: Evidence from Reverse LBOs
NBER Working Paper No. 3798
We investigate the transition from private to public ownership of companies that had previously been subject to leveraged buyouts. As they go to the public markets for equity, such firms face an information asymmetry problem. Behavioral effects are also likely to be at work. We show that the combination of informational and behavioral effects will cause firms to handle information in particular ways, leading to an equilibrium pattern in which disappointing performance after the initial public offering should be expected. We find empirical support for this theory by studying 62 reverse LBOs that went public between 1983 and 1987. There is strong evidence that the performance of the reverse LBOs before going public overestimates their likely performance after the initial public offering. The market appears to anticipate this pattern.
Published: "The Reverse LBO Decision and Firm Performance: Theory and Evidence," Journal of Finance, vol 48, no 4, September 1993, pp 1323-1348