The Impact of Market Timing on European Firms’ Capital Structure: RLBOs vs. IPOs

Our study compares the impact of market timing on the capital structure of reverse leveraged buyouts (RLBOs) and initial public offerings (IPOs). Our sample is made up of 210 RLBOs and 210 public companies listed between 1995 and 2015 and linked by size (turnover) and industry (based on the first two digits of the SIC code). Our results show that the impact of market timing measures on capital structure is different between RLBOs and public companies. In accordance with Baker and Wurgler (2002) and others, these measures have a negative and significant effect on the capital structure of the two types of companies. This significance is persistent ten years after the IPO for public companies and only three years after the IPO for RLBOs. RLBOs rebalance the market timing effect on their capital structures much more quickly and therefore move toward the target debt ratio more quickly than their counterparts. These results challenge the robustness and generality of Baker and Wurgler’s (2002) market timing theory. The capital structure of RLBOs seems to be better explained by the characteristic variables of companies suggested by the theory of trade-off.

The Investment Performance Of Reverse Leveraged Buyouts

This study investigates a previously unexamined potential source of value in LBOs wealth transfers from new public shareholders to the buyout group when the firm returns to public ownership via a reverse LBO. An examination of the investment performance of 53 reverse leveraged buyout firms finds initial underpricing followed by insignificant returns in the aftermarket. The evidence thus does not support the claim that value is appropriated from the new public shareholders in a reverse leveraged buyout.

IPO Timing, Buyout Sponsors’ Exit Strategies, and Firm Performance of RLBOs

This paper studies the impact of buyout sponsors’ initial public offering (IPO) timing on the leveraged buyout (LBO) restructuring process and subsequent exit strategies. I find that LBO duration is negatively related to hot IPO market conditions. Further, following IPOs, reverse leveraged buyouts (RLBOs) with shorter LBO duration experience greater deterioration of performance and higher probability of bankruptcy. This suggests that sponsors’ efforts to enhance operating efficiency succumb to market timing. IPO timing does not affect sponsors’ exit strategies and monitoring post IPO. Sponsors keep an active long-run presence with more reputable sponsors who are more likely to exit by facilitating takeovers.