Reverse Leverage Buyouts, Timing and Underpricing

Abstract

The primary objective of this research is to investigate aspects of the length of time between a LBO and a subsequent IPO (reverse LBO). Short LBO times benefit from the relevance of pre-LBO information, and long LBO times benefit from less uncertainty about future performance. A sample of 251 reversed LBO firms is identified. Initial results indicate the relationship may be non-linear and consistent with the two information advantages. We then test the ability of the time as a LBO to contribute to an explanation of IPO underpricing. The regression model includes revision in issue proceeds, offer price, revisions of offer price, over-allotment option and underwriters' prestige rank. The results do not find a relation between the time as a LBO and underpricing of the IPO. However, variables for revisions of offer price, over-allotment option and underwriters' prestige rank are significant. Further testing supports that there is no relationship between time as a LBO and underpricing. We also find that larger firms tend to stay under private ownership longer, which is consistent with the view that bigger firms are more complex and take longer to complete the restructuring process.