Hands in the Cookie Jar? The Case of Management Buyouts

Abstract

By investigating the effects of managerial ownership on shareholder wealth gains, this paper studies whether managers expropriate outsider shareholder interests in management buyouts. We find that the transaction premiums are negatively associated with the buyout managers' stock holdings, and positively associated with their option holdings. The negative effect of stock holdings on the premiums is mainly driven by the manager-led buyouts whereas the positive effect of option holdings is mainly driven by the manager-led and manager-participating buyouts. A key implication of these findings is that although acquiring managers seek to appropriate shareholder wealth in management buyouts by means of their stock ownership, managerial options provide a shield protecting shareholder interests from the appropriation.