Club Deals in Leveraged Buyouts

We analyze the pricing and characteristics of club deal leveraged buyouts (LBOs)—those in which two or more private equity partnerships jointly conduct an LBO. Using a comprehensive sample of completed LBOs of U.S. publicly traded targets conducted by prominent private equity firms, we find that target shareholders receive approximately 10% less of pre-bid firm equity value, or roughly 40% lower premiums, in club deals compared to sole-sponsored LBOs. This result is concentrated before 2006 and in target firms with low institutional ownership. These results are robust to controls for target and deal characteristics, including size, Q, measures of risk, and time and industry fixed effects. We find little support for benign motivations for club deals based on capital constraints, diversification motives, or the ability of clubs to obtain favorable debt amounts or prices, but it is possible that the lower pricing of club deals is an inadvertent byproduct of an unobserved benign motivation for club formation

Integration and corporate investment

Thesis (Ph.D.)--Massachusetts Institute of Technology, Sloan School of Management, 2002.Includes bibliographical references.This thesis consists of three chapters that broadly investigates, theoretically and empirically, the effect of firm boundaries and organizational processes on internal resource allocation and corporate investment. In the first chapter, I develop an equilibrium model of internal competition for corporate resources and show that managers of integrated firms exaggerate the quality of their projects to get funding. Moreover, I show that the problem gets worse with increased integration and puts an endogenous limit on the amount of value-enhancing redistribution that can be achieved in an integrated firm. I then argue that the control rights that come with asset ownership enable a firm to set "the rules of the game" and mitigate negative managerial behavior through organizational processes such as rigid capital budgets, job rotation, centralization and hierarchies. These results point to a comparative advantage that a firm has over other financial intermediaries in allocating resources. In the second chapter, I empirically explore the effect of integration on the allocation of resources. Specifically, I find that integrated firms use stale information in their investment decisions. In addition, they have more rigid capital budgets and consequently are less responsive to investment opportunities than non-integrated firms. Using a novel approach to identify related segments, I find that the effects are stronger for diversified integrated firms that are engaged in unrelated lines of business. These empirical findings lend support to the theory developed in Chapter 1.(cont.) In the third chapter, I take a case study approach and analyze the investment behavior of nonoil segments of oil companies from 1980 to 1995. I find that oil companies reduced their nonoil investments prior to the 1986 oil shock. I also perform a number of robustness checks and find that the reductions immediately after the oil shock, contrary to earlier research, do not pass conventional levels of statistical significance. A comprehensive dataset of U.S. petrochemical plants provides independent evidence confirming these findings. Finally, I find that oil companies reduced their nonoil investments in 1992 despite a positive shock to oil prices following the Gulf War. I suggest several conjectures to explain the unexpected reduction and discuss potential avenues for further research.by Oguzhan Ozbas.Ph.D

Market Segmentation and Cross-predictability of Returns

We present evidence supporting the hypothesis that due to investor specialization and market segmentation, value-relevant information diffuses gradually in financial markets. Using the stock market as our setting, we find that (i) stocks that are in economically related supplier and customer industries cross-predict each other's returns, (ii) the magnitude of return cross-predictability declines with the number of informed investors in the market as proxied by the level of analyst coverage and institutional ownership, and (iii) changes in the stock holdings of institutional investors mirror the model trading behavior of informed investors. Copyright (c) 2010 the American Finance Association.

Evidence on the Dark Side of Internal Capital Markets

This article documents differences between the Q-sensitivity of investment of stand-alone firms and unrelated segments of conglomerate firms. Unrelated segments exhibit lower Q-sensitivity of investment than stand-alone firms. This fact is driven by unrelated segments of conglomerate firms that tend to invest less than stand-alone firms in high-Q industries. This finding is robust to matching on industry, year, size, age, and profitability. The differences are more pronounced in conglomerates in which top management has small ownership stakes, suggesting that agency problems explain the investment behavior of conglomerates. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: [email protected], Oxford University Press.