The role of buyout backing in the mitigation of IPO-related information asymmetries

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School of Economics | Master's thesis
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PURPOSE OF THE STUDY The purpose of the study is to examine whether professional buyout investors are able to alleviate information asymmetries associated with initial public offerings (IPO). Based on the signaling theory, buyout backing can be viewed as a positive signal of the value and quality of an IPO. I use post-issue abnormal stock returns to measure the degree of information asymmetry related to an IPO. I investigate whether buyout-backed IPOs, in general, are associated with a lower degree of information asymmetry relative to non-buyout-backed offerings. In addition, I assess the factors that determine the ability of a buyout investor to alleviate IPO-related information asymmetries. More specifically, I examine how the reputation of the buyout investor and the duration of the value-adding buyout process are related to the degree of information asymmetry. DATA The sample used in the study consists of 449 buyout-backed IPOs and 3,875 non-buyout-backed IPOs issued in the US during 1990-2008. The data is obtained from SDC Platinum, Center for Research in Security Prices (CRSP) and Compustat. RESULTS I find no evidence of buyout investors, in general, being able to overcome information asymmetries related to IPOs. Although buyout-backed IPOs, as such, are associated with less extreme abnormal returns compared to the other IPOs in the sample, the difference appears to be explained by firm-specific factors that are characteristic to a leveraged buyout, namely firm size and age, industry, and leverage. The results show that buyout investment duration is negatively associated with the level of post-IPO abnormal returns. The finding is in line with the argument that buyout duration signals the degree to which the financial sponsor has mitigated informational asymmetries and agency problems faced by the new owners in an IPO. Reputational differences among the buyout firms, on the other hand, appear to play no role in the mitigation of information asymmetries.
leveraged buyouts, initial public offerings, information asymmetries, signaling theory
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