LBO Lit Review

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Variable List

LBO

Compustat

non-Compustat

Activity and performance:

  • FCF/TR “Free cash flows” (1) divided by turnover
  • TRGR Turnover growth
  • Tax/TR Income tax divided by turnover
  • ROIC Return On Invested Capital = (operating income before taxes + interest expenses) divided by “economic assets” (WCR + fixed Assets (net))
  • ROE Return On Equity = Net income divided by (stockholders equity - net income)

Business Risk:

  • CVTRGR Coefficient of variation of turnover growth computed on the 3 yearperiod preceding the deal
  • CVROIC Coefficient of variation of ROIC computed on the 3 year-period preceding the deal
  • CVROE Coefficient of variation of ROE computed on the 3 year-period preceding the deal
  • CVFCF/TR Coefficient of variation of FCF/turnover computed on the 3 yearperiod preceding the deal

Composition and characteristics of assets and financial structure:

  • TanA/TA Tangible assets (net) divided by total assets (net)
  • LEV Total debt divided by stockholders equity
  • RET/TA Retained earnings/Total assets
  • NC/TA Net cash/Total assets
  • WCR/TR Working Capital Requirement divided by turnover
  • FA/TA Financial assets (net)/Total Assets (net)
  • TA/TAg Total Assets (net)/Total assets (gross)

Variables:

  • Target-firm size (SIZE)
  • Target-firm liquidity (LIQUIDITY)
  • Asset sales subsequent to the lbo (ASSETSALE)
  • Target-firm return on assets (ROA)
  • Target-firm growth opportunities (GROWTH and MRKTBOOK)
  • target-firm earnings variability (EARNINGVAR)
  • free cash flow ratio (FREECASH)
  • acquisition premium paid (PREMIUM)
  • trend variable (TIMEDUM)

Dependent variables:

  • PBANKL the percentage of the total buyout financing package that is represented by senior bank debt
  • PDEBTSEC: the percentage of the total package that consists of issues of junior debt securities
  • PPREFER: the percentage of the total package represented by issues of preferred stock
  • PCOMMON: the percentage of the total that consists of common equity provided by the buyout group
  • PCASH: the percentage of the total that comes from the use of the target firm's existing cash and marketable securities balances


  • CF = INC-TAX-INTEXP-PFDDIV-COMDIV
  • CF/EQUITY
  • Lagged SALESGR
  • TAX/EQUITY
  • FOOTSTEPS (=1 if competing bid or takeover speculation in WSJ)


  • percentage non-executive directors
  • percentage independent directors
  • duality of CEO and chairman
  • percentage of shares held by CEO
  • percentage of shares held by non-CEO executive directors
  • percentage of shares held by institutions
  • free cash flow (operating cash flow minus interest, tax, dividends, deflated by sales) (cf. Kieschnick (1998) and Halpern et al. (1999)
  • speculation of takeover in financial press
  • Q ratio


  • Operating income/assets
  • Tobin's Q
  • Machinery industry dummy
  • R&D/sales
  • Selling expenses/sales
  • Log(assets)
  • Diversification index
  • High cash flow, low Q
  • Low cash flow, high q
  • Diversified, low q


  • number of LBO's
  • total debt to total capital (book value)
  • total debt to initial deal value
  • interest expense to operating income
  • inside equity ownership fraction


Variables:

  • Full LBO
  • Size
  • Industry Q
  • R&D/Sales

Innovation

Compustat

Non-Compustat

  • Measures innovative activity with patents and new product announcements.
  • Measures firm performance with after tax ROA, sales growth 3-year moving average.
  • Controls for year and industry (two digit SIC code)
  • Does not control for firm size, since it is correlated with R&D spending.

LBO Effects on Innovation Papers

Lerner et al 2011

@article{lerner2011private,
  title={Private equity and long-run investment: The case of innovation},
  author={Lerner, Josh and Sorensen, Morten and Str{\"o}mberg, Per},
  journal={The Journal of Finance},
  volume={66},
  number={2},
  pages={445--477},
  year={2011},
  publisher={Wiley Online Library},
  abstract={A long-standing controversy is whether leveraged buyouts (LBOs) relieve managers from short-term pressures from public shareholders, or whether LBO funds themselves sacrifice long-term growth to boost short-term performance. We examine one form of long-run activity, namely, investments in innovation as measured by patenting activity. Based on 472 LBO transactions, we find no evidence that LBOs sacrifice long-term investments. LBO firm patents are more cited (a proxy for economic importance), show no shifts in the fundamental nature of the research, and become more concentrated in important areas of companies' innovative portfolios.},
  filename={Lerner et al (2011) - Private equity and long run investment the case of innovation}
}

Finds that patents private equity backed firms applied for in the years after the investment are more frequently cited, showing no deterioration in patent orginality and generality. The level of patenting does not appear to consistently change, and the firms' patent portfolios become more focused in the years after the private equity investments. The areas where the firms concentrate their patenting after the private equity investment, and the historical strengths of the firm, tend to be the areas where the increase in patent impact is particularly great.

Data:

Capital IQ data, Dealogic data, SDC VentureXpert, and compilations of news stories to identify private equity transactions, their characteristics, and the nature of their exits. 472 LBO transactions between jan 1980 and december 2005.

Used Harvard business school patent database, which contains U.S. patent and trademark office electronic records through may 2007. HBS patent database was researched and cleaned up version of USPTO database.

Final sample consists of 6398 patents from 472 firms granted from 1984 through may 2007.

Variables:

  • secondary exit - an LBO backed firm subsequently sold to another private equity fund
  • IPO - an lbo backed firm subsequently going public
  • trade sale - an lbo backed firm sbusequently being acquired by a strategic buyer
  • bankruptcy - an lbo backed firm subsequently filing for bankruptcy
  • event year - indicator variables that equal one for the given year in event time (the base year is year 0)
  • post - an indicator variable that equals one for event years 1 and forward
  • post plus one - an indicator variable that equals one for event years 2 and forward
  • share of firm's preinvestment patents in class - the fraction of the firms' pretransaction patents that are in the same industry class
  • change in firm's patents in class - an indicator for whether the difference in the share of patents in the class between the pre- and posttransaction periods is positive
  • post x share - an interaction between post and share of firm's pre-investment patents in class
  • post x change - an interaction between post and change in firm's patents in class

Zahra 1995

 @article{zahra1995corporate,
   title={Corporate entrepreneurship and financial performance: The case of management leveraged buyouts},
   author={Zahra, Shaker A},
   journal={Journal of business venturing},
   volume={10},
   number={3},
   pages={225--247},
   year={1995},
   publisher={Elsevier},
   abstract={Leveraged buyouts (LBOs) have created much controversy in the literature, centering on their potential effect on a company's ability to innovate, engage in new ventures, and support entrepreneurial projects. Some believe that post-LBO debt reduces the financial resources available for entrepreneurial activities. Conversely, others argue that, despite the burden of debt, some LBOs provide executives with an opportunity to innovate and take risks (Malone 1989). However, past studies have focused primarily on changes in R&D spending and ignored other corporate entrepreneurship (CE) activities a firm might pursue. Additionally, these studies have not documented the changes in CE after a management-led LBO. Thus, past studies offer only a snapshot of the effect of LBOs on CE. Finally, earlier studies did not directly examine the association between changes in entrepreneurial activities after the LBO and changes in performance.},
   filename={Zahra (2015) - Corporate Entrepreneurship and Financial Performance The Case of Management Leveraged Buyouts}
 }

Results from this study suggest that a company's commitment to corporate entrepreneurship (measured through innovation and venturing) increase after an LBO. Results also show that post-LBO changes in corporate entrepreneurship are associated with, or accompanied by concurrent changes in company performance.

Data: 47 LBO firms, data from annual reports, business week, compustat, dun's million dollar, interviews, commerce department publications, forbes, funk and scott, fortune, wall street journal

Data was measured with the following variables:

  • Innovation
    • R&D Spending
    • R&D Focus (types, i.e. basic, applied, or developmental)
    • radical product innovation
    • product modification
    • commercialization
    • use of external R&D sources
    • improving R&D staff quality
    • increasing R&D staff size
  • Venturing
    • percent of revenue from new businesses or industries which showed a company's ability to expand operations to achieve profitability
    • the number of new businesses the company has entered that showed an increase in the emphasis on redefining the company's business concept
    • the number of new market segments served by the company that gauged the increase in the scope of operations
  • company performance
    • employee productivity
    • sales-to-beginning assets, shows the company's ability to use its assets effectively
    • return on investment
    • earnings before interest and tax to assets ratio
  • control variables
    • technological opportunities, size, age, and level of debt

Amess et al 2015

 @book{amess2015impact,
   title={The Impact of Private Equity on Firm's Innovation Activity},
   author={Amess, Kevin and Stiebale, Joel and Wright, Mike and others},
   year={2015},
   publisher={D{\"u}sseldorf Institute for Competition Economics (DICE)},
   abstract={The paper analyses the impact of private equity (PE) backed leveraged buyouts (LBOs) on innovation output (patenting). Using a sample of 407 UK deals we find that LBOs have a positive causal effect on patent stock and quality-adjusted patent stock. Our results imply a 6% increase in quality-adjusted patent stock three years after the deal. The increase in innovation activity is concentrated among private-to-private transactions with a 14% increase in the quality-adjusted patent stock. Further analysis supports the argument that PE firms facilitate the relaxation of financial constraints. We also rule out alternative explanations for portfolio firms’ higher patenting activity. Our findings suggest that PE firms do not promote short-term cost-cutting at the expense of entrepreneurial investment opportunities with a long-term payoff.},
   filename={Amess et al (2015) - The Impact of Private Equity on Firms Innovation Activity}
 }

The results show that PE-backed LBOs have a positive causal effect on both patenting and quality-adjusted patents measured by forward citations. This implies an increase in innovation activity rather than an increase in strategic patenting. The impact is predominantly driven by private to private LBO transactions. The findings are consistent with PE firm involvement relaxing financial constraints in firms, facilitating their investment in innovation activity.

Data:

Sources are the Center for Management Buyout Research, FAME, and PATSTAT. Data on PE firms and portfolio firms comes from CMBOR, which provides info on lbo deals. The FAME database provides financial and accounting data for UK firms. PATSTAT provides data on patent applications and citations in Europe. LBOs take place between 1998 and 2005. 407 UK deals.

  • outcome variables
    • patent applications
    • patent applications weighted by forward citations i.e. changes in innovation stocks over time
  • conditioning variables
    • firm size (the log of sales)
    • labour productivity (the log of sales per employee)
    • exporting (an exporter dummy)
    • skill intensity (the log of the average wage)
    • debt (liabilities divided by equity, i.e. leverage)
    • profitability (profit divided by sales)
    • age (log firm age)

Nadant and Perdreau 2015

@article{le2015lbos,
  title={LBOs' effects on innovation: evidence from France.},
  author={Le nAdAnt, Anne-LAure and PerdreAu, Fr{\'e}d{\'e}ric},
  journal={Management International/International Management/Gesti{\'o}n Internacional},
  volume={19},
  number={3},
  year={2015}
  abstract={Using Community Innovation Survey data
from France, we provide an empirical analysis
of the innovative efforts of a sample of
manufacturing firms that underwent a leveraged
buyout. We find no evidence that
LBOs have a negative effect on firm level
of innovation expenditure. In contrast,
results suggest that buyouts have a positive
effect on incremental innovation and that
private equity firms help to make innovation
spending more effective and even
more efficient. It could be that private
equity firms help the company to focus on
its core innovative capabilities and bring
innovative products to the market without
increasing innovation spending.}
  filename={Nadant and Perdreau (2015) - LBO effects on innovation evidence from France}
}

Finds no evidence that ex-post innovation expenditure is lower for LBO targets than for comparable firms in France. Results suggest that buyouts have a positive effect on incremental innovation and that private equity firms help to make innovation spending more effective and more efficient.

Data:

Capital IQ (to isolate transactions), CIS 2006 and CIS 2004(for innovation data, community innovation surveys), DIANE (for financial statements) 1140 LBOs from Capital IQ from 1999 to 2005. Final sample reduced to 110 LBOs

Variables:

All below from Eurostat, see paper Table 5

  • Product innovations
  • Process innovations
  • Organizational innovations
  • marketing innovations
  • patents and other protection methods
  • factors hampering innovation activities

Lerner 2013

   @article{lerner_private_2013,
       title = {Private {Equity} and {Investment} in {Innovation}: {Evidence} from {Patents}},
       volume = {25},
       copyright = {Copyright © 2013 Cantillon and Mann},
       issn = {1745-6622},
       shorttitle = {Private {Equity} and {Investment} in {Innovation}},
       url = {http://onlinelibrary.wiley.com/doi/10.1111/jacf.12018/abstract},
       doi = {10.1111/jacf.12018},
       abstract = {The authors' analysis of the patenting activity of 472 companies that received private equity investments between 1986 and 2005 provides suggestive evidence of an increase in the effectiveness (though not necessarily the quantity) of their innovative activities. After such companies received private equity backing, the patents they applied for received more frequent citations than patents awarded before the involvement of PE firms. Companies acquired by private equity also show no sign of deterioration in patent “originality” and “generality,” which have been shown to be fairly reliable indicators of the fundamental nature of the research. And while there is no clear pattern of change in the level of patenting activity, corporate patent portfolios become more focused in the years after the private equity investments. The increases in our measure of patent “impact” are greatest in the areas that constitute the companies' historical core strengths. These findings are likely to prove increasingly important as private equity continues its incursions into growth areas of the economy.},
       language = {en},
       number = {2},
       urldate = {2016-06-17},
       journal = {Journal of Applied Corporate Finance},
       author = {Lerner, Josh and Sorensen, Morten and Stromberg, Per},
       month = jun,
       year = {2013},
       pages = {95--102},
       file = {Lerner et al (2013) - Private Equity and Investment in Innovation.pdf}
   }

Lerner et al examine the effect of private equity investment on firm innovation. This version is a summary of the previous ones.

Some takeaways:

  • Patent citations used as proxy for quality (which might not be optimal)
  • They do adjust for overall average of non-LBO firms
  • Uses Seagate as a case study

LBO Traits/Incidence/Phenomena Papers

Nadant and Perdreau 2006

@article{le2006financial,
  title={Financial profile of leveraged buy-out targets: some French evidence},
  author={Le Nadant, Anne-Laure and Perdreau, Fr{\'e}d{\'e}ric},
  journal={Review of Accounting and Finance},
  volume={5},
  number={4},
  pages={370--392},
  year={2006},
  publisher={Emerald Group Publishing Limited},
  abstract={: This paper investigates whether firms, which are taken over on the French market through Leveraged Buyouts (LBOs), possess characteristics prior to the change which differentiate them from firms which are not acquired through LBOs. Contrasting 175 LBO targets on the French market with an industry-matched comparison group, we first run univariate analysis and then multivariate analysis(logit regression). Beyond the underscoring of the LBO targets‟ financial features, we conclude that subdividing our sample according to the vendor and bidder type is beneficial. We thus notice that the so-called outperformance of LBO targets prior to the deal hides in fact different cases.}
  filename={Nadant and Perdreau (2006) - Financial Profile of Leveraged Buyout Targets Some French Evidence}
}

Confirms LBO targets are less indebted and possess relatively more liquid assets than their industry counterparts. Contrary to former findings, LBO's business risk also seems to be higher than for non-LBO firms prior to the deal. Also corroborates or disagrees with some dozen other hypotheses.

Data:

List of deals collected from Zephyr database of the BvD Suite for mid 1997 to 2002 and from the french review Capital Finance for the first semester 1997 and for the year 1996. 175 deals

Variables:

Activity and performance:

  • FCF/TR “Free cash flows” (1) divided by turnover
  • TRGR Turnover growth
  • Tax/TR Income tax divided by turnover
  • ROIC Return On Invested Capital = (operating income before taxes + interest expenses) divided by “economic assets” (WCR + fixed Assets (net))
  • ROE Return On Equity = Net income divided by (stockholders equity - net income)

Business Risk:

  • CVTRGR Coefficient of variation of turnover growth computed on the 3 yearperiod preceding the deal
  • CVROIC Coefficient of variation of ROIC computed on the 3 year-period preceding the deal
  • CVROE Coefficient of variation of ROE computed on the 3 year-period preceding the deal
  • CVFCF/TR Coefficient of variation of FCF/turnover computed on the 3 yearperiod preceding the deal

Composition and characteristics of assets and financial structure:

  • TanA/TA Tangible assets (net) divided by total assets (net)
  • LEV Total debt divided by stockholders equity
  • RET/TA Retained earnings/Total assets
  • NC/TA Net cash/Total assets
  • WCR/TR Working Capital Requirement divided by turnover
  • FA/TA Financial assets (net)/Total Assets (net)
  • TA/TAg Total Assets (net)/Total assets (gross)

Roden & Lewellen 1995

 @article{roden1995corporate,
  title={Corporate capital structure decisions: evidence from leveraged buyouts},
  author={Roden, Dianne M and Lewellen, Wilbur G},
  journal={Financial Management},
  pages={76--87},
  year={1995},
  publisher={JSTOR}
  abstract={ We analyze the composition of the financing packages used in a large sample of
leveraged buyout transactions in order to test a set of hypotheses developed in
the prior literature about the determinants of corporate capital structure decisions. We
focus in particular on the role of agency costs, bankruptcy risks, and tax
considerations. We find evidence that all three have an impact, both on the degree of
leverage employed in the transactions and on the attributes of the borrowings
undertaken. The impacts are manifest in systematic relationships between the
proportion and type of debt in the buyout financing package and the target firm's
earnings rate, earnings variability, growth prospects, and its tax and liquidity position}
  filename={Roden and Lewellen (1995) - Corporate Capital Structure Decisions Evidence from Leveraged Buyouts}
}

Attempts to explain why observed financing choices were made by individual firms. Identifies relationships between the characteristics of the target firms and the types of financings that were employed in their acquistion. Evidence that LBO financing decisions appear systematically to be affected by the target firm's growth prospects, the level and variability of return on its assets, its pre-buyout liquidity position, and by tax considerations and post-buyout restructuring plans.

Data:

LBOs that took place in the ten-year period from 1981 to 1990. Annual lists published in Mergers and Acquisitions. Then SEC 10k, 8k or 14D filing. More balance sheet and income statement info from COMPUSTAT and Moody's. Final sample was 107 LBOs

Variables:

  • Target-firm size (SIZE)
  • Target-firm liquidity (LIQUIDITY)
  • Asset sales subsequent to the lbo (ASSETSALE)
  • Target-firm return on assets (ROA)
  • Target-firm growth opportunities (GROWTH and MRKTBOOK)
  • target-firm earnings variability (EARNINGVAR)
  • free cash flow ratio (FREECASH)
  • acquisition premium paid (PREMIUM)
  • trend variable (TIMEDUM)

Dependent variables:

  • PBANKL the percentage of the total buyout financing package that is represented by senior bank debt
  • PDEBTSEC: the percentage of the total package that consists of issues of junior debt securities
  • PPREFER: the percentage of the total package represented by issues of preferred stock
  • PCOMMON: the percentage of the total that consists of common equity provided by the buyout group
  • PCASH: the percentage of the total that comes from the use of the target firm's existing cash and marketable securities balances

Kaplan 2009

   @article{kaplan_leveraged_2009,
       title = {Leveraged {Buyouts} and {Private} {Equity}},
       volume = {23},
       issn = {0895-3309},
       url = {https://www.aeaweb.org/articles?id=10.1257/jep.23.1.121},
       doi = {10.1257/jep.23.1.121},
       abstract = {In a leveraged buyout, a company is acquired by a specialized investment firm using a relatively small portion of equity and a relatively large portion of outside debt financing. The leveraged buyout investment firms today refer to themselves (and are generally referred to) as private equity firms. We describe and present time series evidence on the private equity industry, considering both firms and transactions.  We discuss the existing empirical evidence on the economics of the firms and transactions.  We consider similarities and differences between the recent private equity wave and the wave of the 1980s.  Finally, we speculate on what the evidence implies for the future of private equity.},
       number = {1},
       urldate = {2016-06-17},
       journal = {Journal of Economic Perspectives},
       author = {Kaplan, Steven N. and Stromberg, Per},
       month = mar,
       year = {2009},
       pages = {121--146},
       file = {Kaplan and Stromberg (2009) - LBOs and Private Equity.pdf}
   }

A comprehensive review of the LBO/private equity literature up to 2009. Should be useful for finding additional sources and catching up with somewhat recent research.

Cumming et al 2007

   @article{cumming_private_2007,
       series = {Private {Equity}, {Leveraged} {Buyouts} and {Corporate} {Governance}},
       title = {Private equity, leveraged buyouts and governance},
       volume = {13},
       issn = {0929-1199},
       url = {http://www.sciencedirect.com/science/article/pii/S0929119907000272},
       doi = {10.1016/j.jcorpfin.2007.04.008},
       abstract = {This paper provides an overview of the literature on private equity and leveraged buyouts, focusing on global evidence related to both governance and returns to private equity and leveraged buyouts. We distinguish between financial and real returns to this activity, where the latter refers to productivity and broader performance measures. We also outline a research agenda on this topic.},
       number = {4},
       urldate = {2016-06-17},
       journal = {Journal of Corporate Finance},
       author = {Cumming, Douglas and Siegel, Donald S. and Wright, Mike},
       month = sep,
       year = {2007},
       keywords = {Corporate governance, Financial and real returns, Management buyouts, Private equity, Total factor productivity},
       pages = {439--460},
       file = {Cumming et al (2007) - Private equity LBOs and governance.pdf}
   }


Literature review on LBOs and private equity. Researchers have explored the following in relation to PTP transitions (table 4):

  • Eddey et al (1996): Takeover threat
  • Evans et al (2002): Liquidity, growth rate, leverage, R&D
  • Weir et al (2005a): CEO ownership share, institutional ownership share, CEO Board Chair duality


In addition, should consider difference between hedge fund and private equity-financed buyouts (hedge funds less hands-on).

Lehn and Poulsen 1989

@article{lehn_free_1989,
	title = {Free {Cash} {Flow} and {Stockholder} {Gains} in {Going} {Private} {Transactions}},
	volume = {44},
	issn = {0022-1082},
	url = {http://www.jstor.org/stable/2328782},
	doi = {10.2307/2328782},
	abstract = {We investigate the source of stockholder gains in going private transactions. We find support for the hypothesis advanced by Jensen that a major source of these gains is the mitigation of agency problems associated with free cash flow. Using a sample of 263 going private transactions from 1980 through 1987, our results indicate a significant relationship between undistributed cash flow and a firm's decision to go private. In addition, we find that premiums paid to stockholders are significantly related to undistributed cash flow. These results are especially strong for firms that went private between 1984 and 1987 and also for firms whose managers owned relatively little equity before the going private transaction.},
	number = {3},
	urldate = {2016-06-20},
	journal = {The Journal of Finance},
	author = {Lehn, Kenneth and Poulsen, Annette},
	year = {1989},
	pages = {771--787},
       file = {Lehn and Poulsen (1989) - Free Cash Flow and Stockholder Gains in Going Private.pdf}
}

Supports Jensen's free cash flow hypothesis.

Data:

  • PTP sample from Wall Street Journal Index (1980 through 1989)- see Appendix in paper
  • Firm characteristics from COMPUSTAT

Variables:

  • CF = INC-TAX-INTEXP-PFDDIV-COMDIV
  • CF/EQUITY
  • Lagged SALESGR
  • TAX/EQUITY
  • FOOTSTEPS (=1 if competing bid or takeover speculation in WSJ)

Jensen 1988

   @article{jensen_takeovers:_1988,
       title = {Takeovers: {Their} {Causes} and {Consequences}},
       volume = {2},
       issn = {0895-3309},
       shorttitle = {Takeovers},
       url = {http://www.jstor.org/stable/1942738},
       number = {1},
       urldate = {2016-06-17},
       journal = {The Journal of Economic Perspectives},
       author = {Jensen, Michael C.},
       year = {1988},
       pages = {21--48},
       file = {Jensen (1988) - Takeovers Causes and Consequences.pdf}
   }

General overview of LBOs. Free cash flow theory. For our purposes, the following are relevant:

  • Oil and gas, banking and finance, insurance are top 3 target industries (1981-84)
  • Warning signs: large cash flows, acquisition activity, low growth prospects

Weir 2005

   @article{weir_incentive_2005,
       title = {Incentive {Effects}, {Monitoring} {Mechanisms} and the {Market} for {Corporate} {Control}: {An} {Analysis} of the {Factors} {Affecting} {Public} to {Private} {Transactions} in the {UK}},
       volume = {32},
       issn = {1468-5957},
       shorttitle = {Incentive {Effects}, {Monitoring} {Mechanisms} and the {Market} for {Corporate} {Control}},
       url = {http://onlinelibrary.wiley.com/doi/10.1111/j.0306-686X.2005.00617.x/abstract},
       doi = {10.1111/j.0306-686X.2005.00617.x},
       abstract = {Abstract:  This paper investigates the factors that influence the decision to change the status of a publicly quoted company to that of a private company. We find that firms that go private are more likely to have higher CEO ownership and higher institutional ownership. In relation to their board structures, firms going private tend to have more duality but there is no statistical difference in the proportion of non-executive directors. They do not show signs of having excess free cash flows but there is some evidence of lower growth opportunities. We do not find that firms going private experience a greater threat of hostile acquisition. The results are therefore consistent with incentive and monitoring explanations of going private. Calculation of the probability of going private shows that incentive effects are stronger than the monitoring effects.},
       language = {en},
       number = {5-6},
       urldate = {2016-06-17},
       journal = {Journal of Business Finance \& Accounting},
       author = {Weir, Charlie and Laing, David and Wright, Mike},
       month = jun,
       year = {2005},
       keywords = {incentives, market for corporate control, monitoring, public to private transactions},
       pages = {909--943},
       file = {Weir et al (2005) - Factors affecting Public to Private in UK.pdf}
   }

Considers public to private transitions of non-financial firms in UK (1998-2000) compared to matched controls (by size and industry). This includes management buyouts as well as LBOs. Finds the following relations:

  • US and UK PTPs have different causes, probably due to tax differences with respect to debt versus equity financing.
  • Identifies three hypotheses: market for corporate control, incentive alignment, and monitoring.
    • Market for corporate control: Free cash control, threat of takeover insignificant
    • Incentive alignment, monitoring: Higher CEO shareholdings, higher institutional shareholdings, more duality, lower Q ratios significantly related to higher chance of PTP

Variables:

  • percentage non-executive directors
  • percentage independent directors
  • duality of CEO and chairman
  • percentage of shares held by CEO
  • percentage of shares held by non-CEO executive directors
  • percentage of shares held by institutions
  • free cash flow (operating cash flow minus interest, tax, dividends, deflated by sales) (cf. Kieschnick (1998) and Halpern et al. (1999)
  • speculation of takeover in financial press
  • Q ratio

Opler and Titman 1993

   @article{opler_determinants_1993,
       title = {The {Determinants} of {Leveraged} {Buyout} {Activity}: {Free} {Cash} {Flow} vs. {Financial} {Distress} {Costs}},
       volume = {48},
       issn = {00221082},
       shorttitle = {The {Determinants} of {Leveraged} {Buyout} {Activity}},
       url = {http://search.ebscohost.com/login.aspx?direct=true&db=eoh&AN=0322636&site=ehost-live&scope=site},
       doi = {10.1111/%28ISSN%291540-6261/issues},
       abstract = {This paper investigates the determinants of leveraged buyout activity by comparing firms that have implemented leveraged buyouts to those that have not. Consistent with the free cash flow theory, the authors find that firms that initiate leveraged buyouts can be characterized as having a combination of unfavorable investment opportunities (low Tobin's q) and relatively high cash flow. Leveraged buyout firms also tend to be more diversified than firms that do not undertake leveraged buyouts. In addition, firms with high expected costs of financial distress (e.g, those with high research and development expenditures) are less likely to do leveraged buyouts.},
       number = {5},
       urldate = {2016-06-17},
       journal = {Journal of Finance},
       author = {Opler, Tim and Titman, Sheridan},
       month = dec,
       year = {1993},
       keywords = {Capital and Ownership Structure, Financial Risk and Risk Management, Financing Policy, Goodwill          G32, Value of Firms},
       pages = {1985--1999},
       file = {Opler and Titman (1993) - Determinants of LBO activity.pdf}
   }

Opler and Titman find support for the free cash flow theory and financial distress hypothesis. They also find that firms undergoing LBOs in the 1985 to 1990 subperiod were more diversified than those that did not.

Regression: Logit of Probability of Going Private (1980 to 1990):

  • Operating income/assets
  • Tobin's Q
  • Machinery industry dummy
  • R&D/sales
  • Selling expenses/sales
  • Log(assets)
  • Diversification index
  • High cash flow, low Q
  • Low cash flow, high q
  • Diversified, low q

LBO Duration

Kaplan 1991

@article{kaplan1991staying,
  title={The staying power of leveraged buyouts},
  author={Kaplan, Steven N},
  journal={Journal of Financial Economics},
  volume={29},
  number={2},
  pages={287--313},
  year={1991},
  publisher={Elsevier}
  abstract={This paper documents the organizational status over time of 183 large leveraged buyouts completed between 1979 and 1986. By August 1990, 62% of the LBOs are privately owned, 14% are independent public companies, and 24% are owned by other public companies. The percentage of LBOs returning to public ownership increases over time, with LBOs remaining private for a median time of 6.82 years. The majority of LBOs, therefore, are neither short-lived nor permanent. The moderate fraction of LBO assets owned by other companies implies that asset sales play a role, but are not the primary motivating force in LBO transactions.}
  filename={Kaplan (1991) - The staying power of leveraged buyouts}
}

Implications for the reasons LBOs occur and sources of value in LBO transactions. Describes characteristics, timelines, and stats of LBOs that return to public ownership.

Data:

183 large leveraged buyouts between 1979 and 1986 collected from Securities Data corporation or Morgan Stanley and Company. Post-buyout info obtained from Lotus' Datext databases, Nexis database, Wall street journal articles the year the LBO was completed, and financial reports filed with the SEC

Variables:

  • number of LBO's
  • total debt to total capital (book value)
  • total debt to initial deal value
  • interest expense to operating income
  • inside equity ownership fraction

Van de Gucht 1998

   @article{van_de_gucht_predicting_1998,
       title = {Predicting the duration and reversal probability of leveraged buyouts},
       volume = {5},
       issn = {0927-5398},
       url = {http://www.sciencedirect.com/science/article/pii/S0927539897000236},
       doi = {10.1016/S0927-5398(97)00023-6},
       abstract = {We examine the probability that a firm will return to public status following a leveraged buyout (LBO) transaction and for those LBOs that will eventually reverse, we examine the factors that impact the timing of the reversal. These two dimensions of the reversal decision are studied by estimating standard and split population hazard models for a sample of 343 LBO transactions. Our results indicate that not all LBO firms eventually will reverse, i.e. the net benefits of private status for some firms appear to be permanent. For those LBOs that will reverse, reversal probabilities are found to increase over the first seven or eight years following a typical LBO, then to decline thereafter.},
       number = {4},
       urldate = {2016-06-17},
       journal = {Journal of Empirical Finance},
       author = {Van de Gucht, Linda M. and Moore, William T.},
       month = oct,
       year = {1998},
       pages = {299--315},
       file = {Van de Gucht and Moore (1998) - Predicting duration and reversal prob of LBOs.pdf}
   }

Van de Gucht and Moore find that hazard rate of LBO reversals peaks at about 7 to 8 years after the buyout.

Data:

  • 343 LBO transactions $100 million+ (1980-1992) Securities Data Corporation
  • Restricted to those with stock returns in CRSP in year before LBO, post-LBO status identifiable in Newspaper Abstracts or Ward's Business Directory (1994)

Variables:

  • Full LBO
  • Size
  • Industry Q
  • R&D/Sales

Innovation Factors/Phenomena Papers

Artz et al 2010

   @article{artz_longitudinal_2010,
       title = {A {Longitudinal} {Study} of the {Impact} of {R}\&{D}, {Patents}, and {Product} {Innovation} on {Firm} {Performance}},
       volume = {27},
       copyright = {© 2010 Product Development \& Management Association},
       issn = {1540-5885},
       url = {http://onlinelibrary.wiley.com/doi/10.1111/j.1540-5885.2010.00747.x/abstract},
       doi = {10.1111/j.1540-5885.2010.00747.x},
       abstract = {Because of increasing levels of competition and decreasing product life cycles, a firm's ability to generate a continuous stream of innovations may be more important than ever in allowing a firm to improve profitability and maintain competitive advantage This paper investigates several issues that are central to an examination of the innovation productivity in a firm. First, the relationship between a firm's commitment to research and development and its innovative outcomes is examined. Two innovative outcomes are analyzed: (1) invention, which focuses on the development of new ideas; and (2) innovation, the development of commercially viable products or services from creative ideas. Invention is measured by the number of patents granted, and innovation is assessed by the number of new product announcements. Second, because many inventions ultimately result in marketable innovations and because patents may provide protection for new products, the relationship between patents and product announcements is also investigated. Finally, the ability of a firm to benefit from its inventions and innovations is studied by examining their separate effects on firm performance, measured as return on assets (ROA) and sales growth. Drawing from a sample of 272 firms in 35 industries over 19 years, the results from a model of simultaneous equations provided support for some of the hypotheses, but several other surprising findings were found. As expected, R\&D spending was positively related to patents. This finding is consistent with others who argue that internal research capabilities, particularly those with a strong basic research component, is key to enabling a firm to generate creative outputs. More surprising was the finding of increasing returns to scale to R\&D spending. While this contradicts much of the existing research, it is consistent with economic arguments for the advantages of scale in innovation. Also interesting is the finding that, while a significant curvilinear relationship exists between R\&D spending and product announcements, it is not the predicted inverse-U but instead a U-shaped relationship. Consistent with previous work, product announcements were found to be positively related to both performance measures. A negative relationship was found between patents and both ROA and sales growth. While these findings were unexpected, they are intriguing and call into question the value of patents as protection mechanisms. In addition, these results may be resulting from the rise of strategic patenting, where an increasing number of firms are using patents as strategic weapons. As expected, a positive relationship was found between patents and new product announcements.},
       language = {en},
       number = {5},
       urldate = {2016-06-17},
       journal = {Journal of Product Innovation Management},
       author = {Artz, Kendall W. and Norman, Patricia M. and Hatfield, Donald E. and Cardinal, Laura B.},
       month = sep,
       year = {2010},
       pages = {725--740},
       file = {Artz et al (2010) - Impact of RD Patents and Innovation on Firm Performances.pdf}
   }

Analyzes relationship between firm performance and R&D/innovative activity.

  • Argues for increasing returns to scale in R&D spending.
  • Also claims patents are negatively related to growth in this sample.

Data:

  • 272 firms for 19 one-year periods
  • COMPUSTAT 1984 to 2004, NBER Patent Citation Data Files (2001), Patents BIB, new product announcements from Factivia (cross-checked with F&S Predicast)

Variables:

  • Measures innovative activity with patents and new product announcements.
  • Measures firm performance with after tax ROA, sales growth 3-year moving average.
  • Controls for year and industry (two digit SIC code)
  • Does not control for firm size, since it is correlated with R&D spending.

Hitt 1991

   @article{hitt_effects_1991,
       title = {Effects of {Acquisitions} on {R}\&{D} {Inputs} and {Outputs}},
       volume = {34},
       issn = {0001-4273},
       url = {http://www.jstor.org/stable/256412},
       doi = {10.2307/256412},
       abstract = {Making acquisitions, although a popular strategy, may not always lead to positive firm performance. Researchers have offered several explanations for this relationship. One is that acquisitions lead to lower investments in R\&D and curtail the championing process whereby organization members internally promote new products and processes in firms. The current research found that acquisitions had negative effects on "R\&D intensity" and "patent intensity."},
       number = {3},
       urldate = {2016-06-17},
       journal = {The Academy of Management Journal},
       author = {Hitt, Michael A. and Hoskisson, Robert E. and Ireland, R. Duane and Harrison, Jeffrey S.},
       year = {1991},
       pages = {693--706},
       file = {Hitt et al (1991) - Effects of Acquisitions on RD.pdf}
   }

Hitt et al argue that acquisitions are substitutes for R&D/patents and other investments. We should keep this in mind when using these as regressors in the same equation.

Hagedoorn 2003

   @article{hagedoorn_measuring_2003,
       title = {Measuring innovative performance: is there an advantage in using multiple indicators?},
       volume = {32},
       issn = {0048-7333},
       shorttitle = {Measuring innovative performance},
       doi = {10.1016/S0048-7333(02)00137-3},
       abstract = {The innovative performance of companies has been studied quite extensively and for a long period of time. However, the results of many studies have not yet led to a generally accepted indicator of innovative performance or a common set of indicators. So far the variety in terms of constructs, measurements, samples, industries and countries has been substantial. This paper studies the innovative performance of a large international sample of nearly 1200 companies in four high-tech industries, using a variety of indicators. These indicators range from R\&D inputs, patent counts and patent citations to new product announcements. The study establishes that a composite construct based on these four indicators clearly catches a latent variable 'innovative performance'. However, our findings also suggest that the statistical overlap between these indicators is that strong that future research might also consider using any of these indicators to measure the innovative performance of companies in high-tech industries. (C) 2002 Elsevier Science B.V. All rights reserved.},
       language = {English},
       number = {8},
       journal = {Research Policy},
       author = {Hagedoorn, J. and Cloodt, M.},
       month = sep,
       year = {2003},
       note = {WOS:000184881000006},
       keywords = {acquisitions, exploration, firm level, high-tech industries, impact, industry, innovative performance, inventions, patent citations, patents, research-and-development, spillovers, technology},
       pages = {1365--1379}
   }

Seeks to establish commonality in the measurement of innovative performance. Its indicators include R&D inputs(expenditures), patent counts, patent citations, and new product announcements. Results of study are that any of these four indicators could be taken as a measure of innovative performance in the broad sense.

Unsorted

Axelson 2013

   @article{axelson_borrow_2013,
       title = {Borrow {Cheap}, {Buy} {High}? {The} {Determinants} of {Leverage} and {Pricing} in {Buyouts}},
       volume = {68},
       issn = {1540-6261},
       shorttitle = {Borrow {Cheap}, {Buy} {High}?},
       url = {http://onlinelibrary.wiley.com/doi/10.1111/jofi.12082/abstract},
       doi = {10.1111/jofi.12082},
       abstract = {Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories. Using a large, international sample of buyouts from 1980 to 2008, we find that buyout leverage is unrelated to the cross-sectional factors, suggested by traditional capital structure theories, that drive public firm leverage. Instead, variation in economy-wide credit conditions is the main determinant of leverage in buyouts. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.},
       language = {en},
       number = {6},
       urldate = {2016-06-17},
       journal = {The Journal of Finance},
       author = {Axelson, Ulf and Jenkinson, Tim and Strömberg, Per and Weisbach, Michael S.},
       month = dec,
       year = {2013},
       pages = {2223--2267},
       file = {Axelson et al (2013) - Determinants of Leverage and Pricing.pdf}
   }

Discusses financing and pricing of LBOs. Only tangentially relevant to our project.


Cloodt et al 2006

   @article{cloodt_mergers_2006,
       title = {Mergers and acquisitions: {Their} effect on the innovative performance of companies in high-tech industries},
       volume = {35},
       issn = {0048-7333},
       shorttitle = {Mergers and acquisitions},
       url = {http://www.sciencedirect.com/science/article/pii/S004873330600045X},
       doi = {10.1016/j.respol.2006.02.007},
       abstract = {This study examines the post-M\&A innovative performance of acquiring firms in four major high-tech sectors. Non-technological M\&As appear to have a negative impact on the acquiring firm's post-M\&A innovative performance. With respect to technological M\&As, a large relative size of the acquired knowledge base reduces the innovative performance of the acquiring firm. The absolute size of the acquired knowledge base only has a positive effect during the first couple of years after which the effect turns around and we see a negative effect on the innovative performance of the acquiring firm. The relatedness between the acquired and acquiring firms’ knowledge bases has a curvilinear impact on the acquiring firm's innovative performance. This indicates that companies should target M\&A ‘partners’ that are neither too unrelated nor too similar in terms of their knowledge base.},
       number = {5},
       urldate = {2016-06-17},
       journal = {Research Policy},
       author = {Cloodt, Myriam and Hagedoorn, John and Van Kranenburg, Hans},
       month = jun,
       year = {2006},
       keywords = {high-tech industries, innovative performance, M\&As},
       pages = {642--654},
       file = {ScienceDirect Full Text PDF:C\:\\Users\\James Chen\\AppData\\Roaming\\Zotero\\Zotero\\Profiles\\g2eepc1b.default\\zotero\\storage\\SEU8CIRN\\Cloodt et al. - 2006 - Mergers and acquisitions Their effect on the inno.pdf:application/pdf;ScienceDirect Snapshot:C\:\\Users\\James Chen\\AppData\\Roaming\\Zotero\\Zotero\\Profiles\\g2eepc1b.default\\zotero\\storage\\RDJIG292\\S004873330600045X.html:text/html}
   }

Berg and Gottschalg 2005

   @article{berg_understanding_2005,
       title = {Understanding value generation in buyouts},
       volume = {02},
       issn = {0219-869X},
       url = {http://www.worldscientific.com/doi/abs/10.1142/S0219869X05000221},
       doi = {10.1142/S0219869X05000221},
       abstract = {Buyouts have been described as a specific form of financial acquisition that leads to potentially substantial, but also highly volatile returns to equity investors. Previous research has illustrated a number of mechanisms through which buyouts cause increases or decreases in company value. Besides the traditional mechanisms like improved governance or incentive systems, more innovative and entrepreneurial levers like increasing strategic distinctiveness and mentoring are examined. While it is important to understand the performance impact of each of these levers individually, we are still missing a comprehensive framework that captures the full complexity of the buyout value generation process and recognizes interdependences between various factors. In this paper, we develop a three-dimensional conceptual framework for value generation in buyouts that categorizes and links the different levers of buyouts value generation. This framework provides the basis to take a look beyond individual value levers and sheds light on the underlying strategic logic of buyouts. We then review the literature on buyouts and categorize previously identified levers of value generation according to our framework. At the same time, we identify a number of levers that have received little attention in the academic literature so far or still lack convincing empirical support for their performance impact. Building upon this assessment of the status quo in research in buyout value generation, we outline an agenda for future research.},
       number = {01},
       urldate = {2016-06-17},
       journal = {Journal of Restructuring Finance},
       author = {Berg, Achim and Gottschalg, Oliver F.},
       month = mar,
       year = {2005},
       pages = {9--37},
       file = {Snapshot:C\:\\Users\\James Chen\\AppData\\Roaming\\Zotero\\Zotero\\Profiles\\g2eepc1b.default\\zotero\\storage\\P9BC7B8C\\S0219869X05000221.html:text/html}
   }
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