The impact of ownership structure and corporate governance characteristics on LBO gains

This paper explores the relationship between ownership structure and firm value by examining the market effects of LBO transactions. LBO transactions are assumed to solve inefficiencies due to Agency conflicts in the firm, either between the shareholders and the manager or between the major owner and minority shareholders. Principal - Agent Agency (PAA) conflicts are expected to dominate in the US, where ownership structures tend to be dispersed, while Principal-Principal Agency (PPA) conflicts are more likely to dominate in Continental Europe, where concentrated ownerships is the most common form of structure. With a sample of 63 transactions with French, German and US targets from 1998 to 2004, I find that US targets have higher abnormal returns at the time of announcement than European targets, but have negative post-event abnormal returns. I also find that PAA problems, proxied by the Tobin Q and cash flow retention, are indeed a source of gain for the LBO investor. Also the management ownership appears to have a significant impact on the gains: I find that the situation that creates Agency conflicts is when two controlling parties, outsider and manager, are facing each other with equivalent forces.