LBOs, Reversions and Implicit Contracts

Richard A. Ippolito · William H. James

92 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Private Equity and Venture Capital

Abstract

ABSTRACT The conventional view of going‐private transactions is that they are designed to enhance the efficiency of the firm (for example, Jensen (1986) ). A starkly different view is that these and other control transactions are motivated to effect transfers from other stakeholders in the firm to equity holders ( Shleifer and Summers (1988) ). This study exploits data describing pension terminations as a way to test these theories. We conclude that the efficiency theory can plausibly explain a substantial number of LBO‐related terminations, but not enough to undermine the transfer theory. More specific predictions from the efflciency theory are needed to structure more exacting tests.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1996Agency costs of free cash flow, corporate finance, and takeovers 1989Free Cash Flow and Stockholder Gains in Going Private Transactions 1989Corporate takeovers: causes and consequences 1989Management Buyouts: Evidence on Taxes as a Source of Value 1984Going Private: Minority Freezeouts and Stockholder Wealth 1976Corporate pension funding policy 1977The Principles of Corporate Pension Finance

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Employee buyouts: causes, structure, and consequences1The authors appreciate the helpful comments received from Edward Rice (the referee), Clifford Smith (the editor), Tom George, N.R. Prahbala, Greg Roth, Anil Shivdasani, Neil Sicherman, Luigi Zingales, the seminar participants at Harvard University, Michigan State University, the Universities of Georgia, Pittsburgh, and South Carolina, the 1994 Financial Management Association Meeting, the 1994 Western Finance Association Meeting, the research assistance of Rohan Christie-David, Andy Saporoschenko, Tom Smythe, and Cynthia McDonald.1