The Effects of LBO Events on Industry Rivals

Abstract

The rivals of LBO targets experience an abnormal return on equity of 1.2% in the seven day window surrounding the LBO announcement. There are three hypotheses that may explain the wealth effects: the Pure Acquisition Hypothesis, the Competition Dynamics Hypothesis, and the Private Information Hypothesis. Our analysis provides the most support for the Pure Acquisition Hypothesis, which attributes the wealth effect to the increased probability of the rival firm receiving an LBO offer. We also find support for a version of the Private Information Hypothesis, if the private information is considered to be a general undervaluation of firms in the industry. There is comparatively little support for the Competition Dynamics Hypothesis. This is the first paper to test all three of these hypotheses in the same framework, and updates the existing literature on the subject for the second LBO wave of the late 1990s and 2000s.