Effect of LBO announcement on private information in US market.

Abstract

The objective of our study is to investigate whether the announcement of leveraged buyouts (LBOs) triggers the motivation for investors to conduct additional research to increase their private information of the target firm. We measure the level of private information reflected in the stock prices using (1-R2), where R2 is the measure of goodness of fit of the market model. To the best of our knowledge, this is the first study that investigates how LBO announcement affects the level of private information. Our sample comprises of 158 LBO target firms in the United States (US) market for the period from 2000 to 2008. Results from our study show that there is a significant increase in the level of private information reflected in stock prices upon the announcement of LBO deals. Therefore, we infer that LBO announcement motivates investors to do their own research and analysis of target firms. This implies that government policies should encourage higher transparency of information, especially for LBO deals in order to improve market efficiency. Furthermore, we find that although there is significant increase in the level of private information upon announcement of LBO deals led by third-parties, the results are insignificant for management-led buyouts. We also find that large firms have significantly higher level of private information reflected in the stock prices upon announcement of LBO deals, while there is no significant change in the level of private information for small firms.