Essays on Reverse Leveraged Buyouts

Abstract

This dissertation studies target capital structure, transitory debt and corporate governance applications in private equity firms portfolio companies by utilizing a unique sample of reverse leveraged buyouts (reverse LBOs). In chapter 1, I investigate target capital structure and transitory debt. I show that firms follow target capital structures and they quickly reduce their debt ratios to levels near target ratios at the time of the reverse LBO. A minority of firms in the sample increase debt significantly after the reverse LBO. In accordance with the transitory debt hypothesis, these firms value the option to borrow and decrease their debt levels accordingly so that they can preserve the option to borrow for future. When the firms have valuable investment options, they once again issue transitory debt deliberately but temporarily, they move away from their target leverage ratios, use the proceeds from the issue mainly for investment purposes, and they revert back to the target leverage levels gradually. In chapter 2, I investigate the corporate governance structures employed by private equity firms in their portfolio companies. I show that, compared to the control firms, RLBO firms prefer to be incorporated in Delaware and have unitary boards, have younger board members with shorter tenures, have more financial experts on their boards, have CEOs with shorter tenures, prefer busy board members and busy boards. They also have smaller number of members on their boards, compared to previous findings from earlier decades. In addition, the majority of board members are effectively monitoring directors and the majority of board members on various committees of the boards are independent directors. In addition, firms are associated with high ownership by blockholders, high total managerial ownership, and low CEO ownership. Lastly, the evidence suggests that top executives and CEOs of RLBO firms do not receive significantly higher levels of compensation compared to control firms. Also, RLBO firms usually prefer to pay a higher fraction of total compensation in form of bonuses, and less in the form of stock option grants.%%%%Ph.D., Finance – Drexel University, 2013