Undervaluation Induced LBOs

Abstract

This paper shows that market timing drives private equity activity. Using mutual fund fire sales as a source of target undervaluation, we show that both public-toprivate and private-to-private deals are more common following a fire sale. Since fire sales are unrelated to firm fundamentals, we use this setting to provide causal evidence on the effects of private equity ownership on targets’ characteristics.

Authors

Dyaran S. Bansraj, City, University of London, Bayes Business School
Aneel Keswani, City, University of London, Bayes Business School
Per Strömberg, Swedish House of Finance and Stockholm School of Economics
Francisco Urzúa I., City, University of London, Bayes Business School