MANAGERIAL ABILITY AND ITS IMPACT ON LEVERAGED BUYOUTS

Abstract

This study examines the role of managerial ability in leveraged buyouts decision. We find evidence among 525 leveraged-buyout firms that managerial ability is negatively-related to the decision of leveraged buyouts. Furthermore, we find little evidence that managerial ability predicts premium paid, which suggests that while managerial ability is an important factor in the LBO decision, other factors affect premiums. Surprisingly, we don’t find evidence that managerial ability has predictive powers in determining CEO turnover of acquired firms. Our results is consistent with Jensen agency cost of free cash flow problem, and suggest that PE firms help improve corporate governance of firms.