Do LBO Motives Differ Between Large and Small Firms?

Sammanfattning: Authors of previous takeover prediction models treat small and large takeover targets as one homogenous group. Our empirical results show that treating large and small LBOs as one homogenous group leads to misleading takeover prediction results and low prediction power. We find that small public-to-private LBO transactions are mainly driven by undervaluation of the target while large public-to-private LBO transactions are driven by potential to increase efficiency as well as transfer wealth from limited partners to general partners. Since the motives for large and small differ, prediction of small and large public-to-private LBO transactions cannot be achieved with one model. We show that separating small and large LBOs increases prediction accuracy from 46% to 74% and 70% respectively. A direct implication of this would be higher abnormal returns earned from an investment trading strategy based on stock-picking takeover targets in advance.