Governance Effects of LBO Events

Abstract

We examine the effects of leveraged buyouts (LBOs) on the industry rivals of the firms that undertake the LBO. Specifically, we are interested in determining whether or not the rivals that remain public take steps to change their governance mechanisms to emulate the firms that go private. Specifically, we examine CEO compensation, and the compensation and composition of the board of directors. We document an increase in the number of options awarded to CEOs following LBO activity in an industry, and a decrease in annual bonuses and restricted stock grants as LBO activity slows down. Our results also indicate the likelihood of changing the CEO is positively correlated with LBO activity. We also demonstrate significant changes in the pay for directors and the structure of the board after LBOs occur in an industry. Overall, our examination yields results that indicate firms effectuate significant corporate governance changes following an LBO event in their industry.