THE REVERSE LBO DECISION AND FIRM PERFORMANCE - THEORY AND EVIDENCE

We investigate the transition from private to public ownership of comp anies that bad previously been subject to leveraged buyouts (LBOs). We show that the information asymmetry problem firms face when they go t o public markets for equity, as well as behavioral and debt overhang e ffects, will produce a pattern in which superior performance before an offering should be expected, with disappointing performance subsequen tly. We find empirical evidence of this phenomenon by studying 62 reve rse LBOs that went public between 1983 and 1987. The market appears to anticipate this pattern.