Efficiency Gains or Market Timing? The Source of Wealth Gains from Management Buyouts Revisited

Abstract

Recent studies of leveraged buyouts (LBOs) have reported that firm managers time buyouts so as to maximize profits from undervaluation or overvaluation of the target firms; the literature on management buyouts (MBOs) from the 1990s attributes the source of value enhancement to organizational change. Furthermore, since the mid-1990s there have been a variety of changes in the private equity (PE) industry, such as the junk bond crisis and the Sarbanes-Oxley Act. Taken together, there is doubt about the validity of applying findings from historic studies advocating the efficiency gains of MBOs to the recent and current MBO industry. Here, we replicate the work of Ofek (1994) to reexamine what better explains the improved performance of recent MBOs between 1995 and 2012. We find that organizational change through MBOs contributes to the enhancement of MBO performance, which is consistent with the findings of Ofek (1994). Our results support the robustness of the organizational change hypothesis, regardless of recent changes in PE industry.