Rethinking value creation in leveraged buyouts: Board restructurings over the public-private-public cycle

Purpose: This study aims to examine the governance structure of the firm undergoing a complete buyout cycle (reverse leveraged buyout). Its purpose is to empirically explore the evolution of corporate board structures as a unique source of value creation, in addition to the agency mechanisms of the discipline of debt and incentives of equity participation. Design/methodology/approach: The authors rely on agency theory and the resource dependence perspective to develop sets of hypotheses that examine changes in the board composition of 65 R-LBOs and 65 matched continuing firms spanning a 25-year period (1979-2004). Findings: The empirical results reveal numerous insights about why R-LBOs go private, to what extent boards restructure during the buyout phase, and how those changes relate to firm performance. Taken together, the findings give strong credence to the argument that boards represent a supplemental source of value creation in the buyout process. Research limitations/implications: For scholars, the study presents a platform for further inquiry into the role of boards of directors in R-LBOs as well as the inclusion of resource dependence theory to inform on the phenomenon. Practical implications: The study helps to address this new source of value creation for practical interest. It offers a benchmark for buyout firms to compare their board characteristics by establishing linkages between pre-buyout deficiencies, post-buyout modifications, and post-SIPO performance. Originality/value: The results shift scholarly attention away from the structural governance tools to the group dynamics of the board. The findings call into question the restricted attention given by buyout researchers to leverage and ownership as value drivers by prompting a closer evaluation of the relationship between buyout board structures and related structuring of debt and managerial equity participation. Furthermore, the inclusion of the resource-dependency perspective alongside agency theory as an explanatory theory allows for a richer account of the LBO phenomenon and its sources of value creation.