The Reverse LBO Decision and Firm Performance: Theory and Evidence




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    • Degeorge is from the Kennedy School of Government, Harvard University, and Zeckhauser is from the Kennedy School of Government, Harvard University, and NBER. We thank John Pratt for his help with the model, and David Cutler, Darryll Hendricks, Jay Patel, Andrei Shleifer, and seminar participants at Groupe HEC, the NBER workshop on Behavioral Finance, and the Stanford Seminar on Conflict and Negotiation for helpful comments. A referee provided very helpful suggestions. We are indebted to Laurie King for research assistance. The Decision, Risk, and Management Science Program of the National Science Foundation, and the Harvard Corporate Voting Research Project provided support.


We investigate the transition from private to public ownership of companies that had previously been subject to leveraged buyouts (LBOs). We show that the information asymmetry problem firms face when they go to public markets for equity, as well as behavioral and debt overhang effects, will produce a pattern in which superior performance before an offering should be expected, with disappointing performance subsequently. We find empirical evidence of this phenomenon by studying 62 reverse LBOs that went public between 1983 and 1987. The market appears to anticipate this pattern.