MBO Withdrawals and Determinants of Stockholders’ Wealth

Abstract

Not all firms that intend to go private do so successfully. A number of management buyouts are announced but subsequently withdrawn. It is documented in this study that the stock market reacts negatively to MBO withdrawal announcement. This adverse effect, however, is alleviated in firms where inside directors hold higher proportions of equity ownership and where boards of directors are dominated by independent directors. The results suggest that higher ownership by inside directors helps align management’s and shareholders’ interests whereas outside-dominated boards better monitor management, whose fiduciary duties to shareholders may be compromised by conflicts of interest inherent in management buyouts. Finally, there is evidence that firms that could have taken the offer by another bidder but decided in favor of the MBO, which subsequently fails, suffer more adverse market reactions when the MBO is withdrawn.

Keywords: MBO, LBO, management buyouts, leveraged buyouts, corporate governance, ownership, agency theory, agency costs, agency problems

JEL Classification: G32, G34