Management Performance in Leveraged Buyouts: An Empirical Analysis
Bull, Ivan Ole
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https://hdl.handle.net/2142/71403
Description
Title
Management Performance in Leveraged Buyouts: An Empirical Analysis
Author(s)
Bull, Ivan Ole
Issue Date
1987
Department of Study
Accountancy
Discipline
Accountancy
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Accounting
Abstract
The objective of this dissertation is to measure the extent of change in management performance after certain types of leveraged buyouts. A secondary objective is to provide insight into causes of performance changes.
Only leveraged buyouts which meet ownership requirements and which avoid restructurings are included in the study. Operating managers must own equity, and a major restructuring must not occur in the two years before or in the two years after the year of the leveraged buyout.
After adjusting pre-buyout financial statements to reflect the new accounting bases established by purchase accounting at the time of the transaction, accounting variables are used to compare performance. Those variables are: (1) Income from Continuing Operations/Beginning Equity; (2) Earnings Before Interest and Income Taxes/Beginning Assets; (3) Sales/Beginning Assets; (4) Sales; (5) Operating Profit/Sales; (6) Cash Available for Debt Service/Sales; (7) Income Tax Expense/Sales.
Empirical evidence strongly supports the hypothesis that management performance improves in the two years after a leveraged buyout as compared to the two years before the buyout. Savings in income taxes account for part of the improvement, but efficiency types of improvement are also evident.
Underlying causes for improvement are not obvious. Neither financial statements nor interviews establish the reasons for change. Institutional investor executives, principals in leveraged buyout investment firms, and CEOs of leveraged buyout companies provide useful information, but do not directly identify causes. Benefits which accrue from entrepreneurial actions by managers and from a reduction of agency costs seem to provide the most likely explanation.
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