The Long-run Performance of LBO-backed IPOs: An Event Study of Post-IPO Abnormal Returns and their Implications for Equity Investors

Sophie-Amalie Feldskov Vorre & Mathias Hoier Stenkilsson

Studenteropgave: Kandidatafhandlinger


Since the invention of the high yield bond, the so-called ‘junk bond’ innovation, in the early 1980s, we have witnessed a surge in the frequency and volume of leveraged buyouts (LBOs). Although these highly levered transactions have risen to become a prominent and perhaps permanent part of contemporary financial markets, they have received surprisingly little attention from the academic literature. Given that LBOs today account for a significant and continuously growing share of initial public offerings (IPOs) (see, e.g., Cao and Lerner 2009 and Kaplan 2009), this master thesis aims to extend the current literature and provide further insights into the long-run implications of LBO-backed IPOs for equity investors’ wealth. To address this, this thesis applies an event study methodology to analyze the performance of LBO-backed IPOs relative to 1) the overall market, and 2) other non-LBO-backed IPOs. Based on pricing data for the first three years following the IPO, we compute and analyze the buyand-hold abnormal returns to assess whether these are significantly different from zero. We then proceed to estimate the buy-and-hold abnormal returns for the non-LBO-backed IPOs and apply statistical tests to assess whether there are any differences in the performance of these two groups. We augment our findings from the analysis of buy-and-hold returns by estimating Jensen’s alpha (excess return over the theoretical expected return) for calendar time portfolios off all LBO-backed IPOs. Based on our event study results, we then proceed with fitting a cross-sectional regression model to test if any target-, acquirer-, or deal-specific factors may explain the abnormal return patterns identified in our event study. Based on a sample of 232 US LBO-backed IPOs between 1985 and 2018, this thesis finds that, on average, the LBO-backed IPOs outperformed both the overall market and other IPOs, suggesting that it may be particularly expensive for these firms to raise capital in the public equity markets, and consequently, that post-IPO equity investors may be able to systematically benefit from this pricing inefficiency by buying LBO-backed IPOs and selling them after three years. However, it is also concluded that outperformance is lower today than 30 years ago, suggesting this opportunity window may now be closed. We find that LBO outperformance is lower when the IPO was closed during a ‘hot’ period in the IPO market, suggesting that PEfirms will attempt to time the market at expense of the IPO-equity investors. Lastly, we find a negative relationship between (pre-IPO) leverage and outperformance suggesting the previous literature may have overestimated the positive effect of leverage inspired by agency theory and underestimated the effect of PE-sponsors having “more skin in the game”.

UddannelserCand.merc.kom Erhvervsøkonomi og Virksomhedskommunikation, (Kandidatuddannelse) Afsluttende afhandling
Antal sider85
VejledereKasper Meisner Nielsen