Efficiency and Organizational Structure: A Study of Reverse LBOs




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    • Cox School of Business, Southern Methodist University. Financial support was provided by the Center for the Study of Financial Institutions and Markets at SMU. We are indebted to Amir Barnea, Chris Barry, George Benston, Rich Bettis, Ken Eades, Stuart Gilson, Bob Harris, Mike Hertzel, Wayne Marr, Ron Masulis, John Peavy, David Ravenscraft, Richard Smith, J. Fred Weston, and seminar participants at Arizona State, Emory, Houston, North Carolina, Penn State, SMU, Texas Christian, Tulane, Virginia, Virginia Tech, and the U. S. Securities and Exchange Commission for helpful comments. We are especially indebted to the referee whose suggestions helped improve the paper considerably.


This paper is a report on 72 firms which went public since 1983 but previously underwent a full or divisional LBO. Accounting measures of performance reveal significant improvements in profitability which resulted mainly from these firms' ability to reduce costs. Firms experience dramatic increases in leverage at the LBO, but the leverage ratios are gradually reduced. The evidence is consistent with the hypothesis that the change in the governance structure of these firms towards more concentrated residual claims created a new organizational structure which is more efficient than its predecessor.