Thursday, September 26, 2013
So, this issues gets debated back and forth quite bit. On the one side are those that argue that LBOs are good corporate governance. The presence of debt and the high degree of equity ownership by managers pushes managers to improve efficiency and profitability of the firm in order to quickly pay down that debt. In that way, the LBO structures reduces the agency problems that plague the public corporation. On the hand there are arguments that the LBO is nothing more than financial mumbo-jumbo that does little more than create opportunities for managers to enrich themselves.
Cohn, et al have a contribution to the debate. Their new paper is The Evolution of Capital Structures and Operating Performance after LBO: Evidence from US Corporate Tax Returns. Here's the abstract:
This study uses corporate tax return data to examine the evolution of firms' financial structure and performance after leveraged buyouts for a comprehensive sample of 317 LBOs taking place between 1995 and 2007. We find little evidence of operating improvements subsequent to an LBO, although consistent with prior studies, we do observe operating improvements in the set of LBO firms that have public financial statements. We also find that firms do not reduce leverage after LBOs, even if they generate excess cash flow. Our results suggest that effecting a sustained change in capital structure is a conscious objective of the LBO structure.