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This paper studies insider privatization in transition economies. We show theoretically that the underperformance of insider-privatized firms could be due to the manager-cum-owner's lack of incentives after privatization. A screening theory predicts that a firm's postprivatization incentives increase with the firm's buyout price. The empirical results show that the buyout price decreases with the degree of information asymmetry and that a firm's postprivatization performance increases with the buyout price. We also find that the performance of premium-paying firms converges with that of private firms after privatization; in contrast, heavily discounted firms perform indistinguishably from government-owned firms.

AbstractThis study examines the risk‐adjusted stock returns realized by shareholders of firms acquired through leveraged buyouts to assess the economic gains associated with this type of acquisition. Stockholders of firms acquired through leveraged buyouts realize significant positive abnormal returns as a result of the buyout announcement. The findings support the notion of value creation in leveraged buyouts.