Internet Appendix to "Manager Divestment in Leveraged Buyouts"

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Franklin Parks
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1 Internet Appendix to "Manager Divestment in d Buyouts" In this Internet Appendix, we provide additional results that have been referenced but not reported in the paper. Table IA.1 adds a Manufacturing Firm dummy to the pre-lbo earnings management regressions originally presented in Panel B of Table 5 and referenced on page 24 of the text. The dummy variable equals 1 if the firm is in the single-digit SIC code 2 or 3. Table IA.2 reports the proportion of firms in each of the divestment categories that result in bankruptcy/distress after the LBO. These results are referenced on page 29 of the text. The next two tables IA.3 and IA.4, report analyses relevant to the discussion of endogeneity on pages Table IA.3 contains results of the second-stage auction Logit regressions (originally reported in Panel B of Table 6) estimated using the Instrumental Variable (IV) approach. Table IA.4 contains results of the divestment model (originally reported in Table 4) fitted on subsamples of deals with auctions and/or market checks and deals with bidder competition. Further, we add the percent revision from the initial bid to the offer price (Offer Revision) as an explanatory variable. Lastly, Table IA.5 adds a Club Deal dummy variable to the LBO pricing regressions originally reported in Panel B of Table 6. The variable equals 1 if the acquirer is a private equity consortium, and 0 otherwise. Table IA.1: Table IA.2: Table IA.3: Table IA.4. Table IA.5: Pre-LBO Earnings Management Regressions with Manufacturing Firm Control Post-LBO Bankruptcy/Distress Rates Instrumental Variable Regressions Relative Divestment Regressions Using Subsamples of Buyouts with Auctions/Market Checks and Bidder Competition LBO Pricing Regressions with Club Deal Control 1

The dummy variable equals 1 if the firm is in the single-digit SIC code 2 or 3. Table IA.

2 Table IA.1. Pre-LBO Earnings Management Regressions with Manufacturing Firm Control This table reports parameter estimates from four OLS regressions. Relative divestment is net dollar divestment divided by pre-lbo dollar management team ownership. Discretionary current accruals (DCA) follow the modified Jones methodology. Real earnings management follows Roychowdhury (2006). Expected relative divestment is fitted following Model 1 of Table 4. is operating income before depreciation divided by net sales. is total liabilities divided by total assets. is stock price divided by book value per share. Volatility is the standard deviation of monthly returns over the fiscal year. is the percentage of shares owned by all executive officers. Manufacturing firm dummy variable equals 1 if the firm is in the single-digit SIC code 2 or 3, and 0 otherwise. All financial variables in Panel B are as of t=-2 relative to the year of LBO announcement. Robust t-statistics with year clustering are reported in ( ). Values significantly different from zero at the 10%, 5% and the 1% level are marked *,** and *** respectively. Intercept Relative divestment Exp. relative divestment Volatility Manufacturing firm Discretionary Current Accruals (DCA) (-0.4) 0.063*** (4.3) (-0.4) 0.005*** (2.7) 0.180** *** (3.5) (-0.8) 0.006** 0.192** (2.5) (-0.7) Real Earnings Management Proxy ** (2.2) (-1.5) 0.014* 0.868*** (4.0) (-0.9) (-0.2) 0.375** (2.2) (-0.2) (-1.6) 0.018* (1.8) 0.950*** (4.6) (-1.3) Obs R

Real earnings management follows Roychowdhury (2006). Expected relative divestment is fitted following Model 1 of Table 4. is operating income before depreciation divided by net sales.

3 Table IA.2 Post-LBO Bankruptcy/Distress Rates This table reports the incidence of bankruptcy and/or distress following the LBO. The sample is divided into three groups according to the managers relative divestment. Relative divestment is net dollar divestment divided by pre-lbo dollar management team ownership. Investment/Rollover are deals to which managers contributed additional personal equity or fully reinvested (rolled over) their pre-lbo equity. Divestments are split into two groups: Low (relative divestment < 50%) and High (relative divestment 50%<). The information on bankruptcy and/or distress is collected by performing Lexis-Nexis and web searches. Z-statistic is reported for the difference of proportions between investment/rollover and high divestment deals. Values significantly different from zero at the 10%, 5% and the 1% level are marked *,** and *** respectively. Divestment diff.prop. Investment/Rollover Low<50% High>50% z-stat Bankruptcy/Distress Obs

Investment/Rollover are deals to which managers contributed additional personal equity or fully reinvested (rolled over) their pre-lbo equity.

4 Table IA.3 Instrumental Variable Regressions This table reports results from the second-stage IV (Instrumental Variable) Logit regressions estimating the likelihood of an auction and/or market check and bidder competition and OLS regressions estimating buyout premium (1 yr) and deal/sales. Relative divestment is net dollar divestment divided by pre-lbo dollar management team ownership. In the first-stage, expected relative divestment is fitted following Model 2 in Table 4. Auction and/or market check is a dummy variable that equals 1 if the firm attempts an auction, or, in case of an unsolicited bid, performs a market check and 0 otherwise. Bidder competition is a dummy variable that equals 1 if there is more than one bidder and 0 otherwise. Buyout premium (1yr) is the percentage change from the stock price 1 year before the buyout announcement to buyout price. Deal/sales is a transaction multiple computed as deal value divided by net sales. is operating income before depreciation divided by net sales. is total liabilities divided by total assets. is stock price divided by book value per share. is % shares owned by all executive officers. All financial variables are as of t=-1 relative to the year of the LBO announcement. Pseudo R 2 is reported for the Logit regressions and R 2 for the OLS regressions. Robust t-statistics with year clustering are reported in ( ). Values significantly different from zero at the 10%, 5% and the 1% level are marked *, ** and *** respectively. Intercept Exp. relative divestment ( 1st stage estimated using Model 2 of Table 4) Auction and/or Market Check (0.5) 1.152* (-0.0) (-1.1) 0.550* (1.8) ** (-1.9) Bidder Competition (-0.7) (0.6) (-1.2) 0.254*** * (-1.7) Buyout Premium (1yr) (0.3) 0.708*** (3.0) * (-2.0) 1.173* (0.7) (0.7) Deal/Sales 0.472* ( ** ** (2.5) * (-2.0) 0.062* * (-1.9) Obs Pseudo R 2 /R

bidder competition and OLS regressions estimating buyout premium (1 yr) and deal/sales. Relative divestment is net dollar divestment divided by pre-lbo dollar management team ownership.

5 Table IA.4. Relative Divestment Regressions Using Subsamples of Buyouts with Auctions/Market Checks and Bidder Competition This table reports results from Tobit regressions censored at 1 and fitted on subsamples of auction and/or market check deals and deals with bidder competition. Relative divestment is net dollar divestment divided by pre-lbo management holdings. Offer revision is % change from initial bid to offer price. is operating income before depreciation divided by net sales. is total liabilities divided by total assets. is stock price divided by book value per share. is % shares owned by executive officers. Age is the average age of top 3 officers. Founder dummy equals 1 if the firm's founder is an executive officer and 0 otherwise. Family dummy equals 1 if the firm is family owned and 0 otherwise. Top3 influence is the ratio of Top 3 ownership to management ownership. Industry market-to-book is the average market-to-book ratio of firms in the same 2-digit SIC code. Industry merger activity is the relative volume of merger activity in the same 2-digit SIC code. Industry private equity activity is the relative volume of merger deals carried out by private equity firms in the same 2-digit SIC code. Market return is the one-year compound return of the value weighted CRSP index. All financial variables are as of t=-1 relative to the year of the LBO announcement. Robust t-statistics with year clustering are in ( ). Values significantly different from zero at the 10%, 5% and the 1% level are marked *,** and *** respectively. Constant Offer revision Age Founder dummy Family dummy Top3 influence Industry market-to-book Industry merger activity Industry priv. equity activity Market return Buyouts with Auctions and/or Market Checks (-0.9) (-1.0) *** 0.021*** (5.0) (5.7) ** ** (-2.3) ** ** (-2.2) ** ** (0.6) (-0.1) (1.4) (1.4) Relative Divestment (1.4) Buyouts with Bidder Competition (-1.2) (-1.3) 0.014** 0.014** (-1.6) (-1.3) *** *** (-4.1) (-3.1) ** * (-2.0) (-1.8) (-0.1) * ** (-1.9) (0.8) (-0.1) 0.632** (0.8) 0.573* (1.8) *** (3.1) (-0.8) Obs Pseudo R

of auction and/or market check deals and deals with bidder competition. Relative divestment is net dollar divestment divided by pre-lbo management holdings.

6 Table IA.5. LBO Pricing Regressions with Club Deal Control This table reports results from four OLS regressions estimating buyout premium (1 yr) and deal/sales. Buyout premium (1yr) is the percentage change from the stock price 1 year before the buyout announcement to the buyout price. Deal/sales is a transaction multiple computed as deal value divided by net sales. Relative divestment is net dollar divestment divided by pre- LBO dollar management team ownership. Expected relative divestment is fitted following Model 1 in Table 4. is operating income before depreciation divided by net sales. is total liabilities divided by total assets. Market-tobook is stock price divided by book value per share. is % shares owned by all executive officers. Club deal equals 1 if the acquirer is a private equity consortium, and 0 otherwise. All financial variables are as of t=-1 relative to the year of the LBO announcement. Robust t-statistics with year clustering are reported in ( ). Values significantly different from zero at the 10%, 5% and the 1% level are marked *, ** and *** respectively. Intercept Relative divestment Exp. relative divestment Club deal Buyout Premium (1yr) (0.5) 0.343** (-1.5) 1.255** (0.7) (0.3) (1.5) (0.6) 0.579*** (3.3) ** (-2.3) 1.410* (0.8) ** 0.413** (2.7) ** * 0.065* *** (-3.5) Deal/Sales 0.531** (2.4) 0.558** ** (2.8) * 0.070* (1.9) ** (-0.3) Obs R

Deal/sales is a transaction multiple computed as deal value divided by net sales. Relative divestment is net dollar divestment divided by pre- LBO dollar management team ownership.

Xiaoding Liu and Jay R. Ritter December 20, 2010

Xiaoding Liu and Jay R. Ritter December 20, 2010 Local Underwriter Oligopolies and IPO Underpricing Internet Appendix Figure IA-1 Gross Spread Distribution for Moderate Size IPOs The sample consists of