An Empirical Study on the Sources of Acquisition Premiums:
The Case of Management Buy-outs in Japan
Takuya Kawanishi
Faculty of Administration, Prefectural University of Kumamoto
Takashi Saito
Faculty of Economics, Meiji Gakuin University
Shinya Kawamoto
Faculty of Economics, Niigata Sangyo University
Discussion Paper No.13-05
March, 20140

An Empirical Study on the Sources of Acquisition Premiums:
The Case of Management Buy-outs in Japan∗
Takuya Kawanishi †, Takashi Saito ††, and Shinya Kawamoto †††Abstract
This study examined the sources of acquisition premiums in the public-to-private type of MBOs
implemented by Japanese companies by testing the following five hypotheses emphasized in thepreceding studies including 1) the undervaluation hypothesis, 2) the tax benefit hypothesis, 3) the
agency costs hypothesis, 4) the breach of trust hypothesis, and 5) the listing costs hypothesis. The
empirical analysis supported the undervaluation hypothesis and weakly supported the agency costs
hypothesis.

JEL classification: G34, G32, D22
Keywords: MBO, acquisition premium, undervaluation, breach of trust, tax shield of debts∗ Dr. Konari Uchida (Kyushu University) and Dr. Xu Peng provided the authors with

beneficial comments for the development of this study at the conference of Japan Association
for Applied Economics (Fall 2010 and Fall 2013, respectively). We would like to take thisopportunity to express our appreciation. The contents of this article and opinions about it are
the property of the authors and do not reflect any official opinion of organizations to which
the authors belong. This research is financially supported by the Japan Securities
Scholarship Foundation. Kawanishi and Kawamoto are supported by Grants-in-aid for
Scientific Research from Japan Society for the Promotion of Science (project number
25780205 and 25780211, respectively);†Corresponding author. E-mail address: kawanishi@pu-kumamoto.ac.jp

Tel. : +81-96-321-6686†† E-mail address: taksaito@eco.meijigakuin.ac.jp†††E-mail address: skawamoto@econ.nsu.ac.jp

01. Introduction“Public-to-private (PTP)” management buyouts (MBOs) for corporate managers to opt forwithdrawal from the stock market and to facilitate drastic corporate restructuring have been undertaken
increasingly since the late 1990s. 1 Although MBOs include various other types such as divestiture(divestment), business succession, and business rehabilitation (CMBOR 1991), the PTP type of MBOs
predominates Japan’s MBO market, comprising about 70% in terms of monetary value. 2 Although
the global economic crisis triggered by the subprime loan issue which surfaced in the autumn of 2007
caused a slight decline in terms of their monetary value, the number of PTP MBOs has continued toincrease. They appear to have established their position as an important tool for corporate
reorganization.
– Figure 1 about here –In such an increasingly active MBO market of Japan, the argument on the differences between the
TOB prices offered to squeezed-out shareholders and the latest stock prices, i.e. "acquisition
premiums,” is drawing particular attention. Although views on acquisition premiums associated with
MBOs have traditionally been divided into opposites––one that they reflect the increase in future
shareholder value as a result of corporate reorganization and the other that such premiums derive
simply from wealth transfer from stakeholders––the possibility of the latter has risen as an important
issue in recent years. 3 Examples are the cases of Rex Holdings and Sunstar, which led to litigation
over the level of the stock purchase price.
Acquisition premiums have been examined from various perspectives, primarily using cases in the
U.K. and U.S., having advanced MBO markets. Major research achievements include Kaplan (1989b),
for instance, which pointed out the existence of tax benefits obtained from the increase in debt
associated with MBOs, Lehn and Poulsen (1989), which emphasized the disciplinary role of debt
which forces management to pay out free cash flow after MBOs and Renneboog et al. (2007), which
examined the source of acquisition premiums systematically based on the preceding studies.
How about the case of Japan? The number of research on this topic is increasing as MBO cases
An MBO is defined as the method by which internal human resources working for an
existing company to become principal shareholders and corporate managers bypurchasing the company (business) and establishing a new company (Usui 2001:8).
2 Whereas the MBOs of “public-to-private type” dominate the share in terms of value,
the “divestment type,” in which the manager of business affiliated with a parent
company selects MBO when the parent sells such business, predominates in terms of thenumber of cases (Kawamoto et al. 2012: Fig. 1). See Saito and Kawamoto (2010) and
Kawamoto et al. (2012) for the characteristics of parent companies that implement
divestment MBOs and assessment of such parent companies from the stock market.
3 A number of pages are allocated to this issue is in the “Guidelines for Management
Buyouts (MBO) that Increase Corporate Value and Ensure Fair Process," released by the
Ministry of Economy, Trade, and Industry in 2007.
1

1

have been piling up. Inoue et al. (2010) found the size of acquisition premium is greater for the firm
whose share price is undervalued before the announcement of an MBO. They also found the trend thatmanagement paid more for acquisition premiums after the case against Rex Holdings. Although not a
direct study of MBOs, Nose and Ito (2009) analyzed acquisitions conducted using buyout funds inrecent years and reported correction of undervaluation and reduction of agency costs as importantsources of excess returns. Maesawa (2008) and Yoshimura (2010) studied the impact of MBOs on thewealth of minority shareholders by examining pre-acquisition share prices and the size of acquisition
premiums.
These studies are pioneering attempts to investigate the relevance between MBOs (or buyouts ingeneral) and acquisition premiums of Japanese companies, which, however, are unfortunately not
systematic examinations of the determinants of acquisition premiums, as examinations have been in a
number of studies conducted in other countries. This paper therefore specifically examines thefollowing five hypotheses emphasized in the preceding studies to study the sources of acquisition
premiums including 1) the undervaluation hypothesis, 2) the tax benefit hypothesis, 3) the agency
costs hypothesis, 4) the breach of trust hypothesis, and 5) the listing costs hypothesis.
This article is structured as follows: The next section introduces preceding studies of MBOs andacquisition premiums and presents some working hypotheses. The third section presents a descriptionof the dataset used for empirical analysis and provides an estimation model and the sign condition ofeach variable. The fourth section will report the results of empirical analysis; the fifth will be dedicatedto the conclusion and issues to be addressed in the future.

2. Preceding Studies and Working Hypotheses 4
This section introduces preceding studies of the sources of acquisition premiums paid in theimplementation of MBOs. Moreover, it presents working hypotheses for the subsequent sections.

2.1. The undervaluation hypothesis
Normally, asymmetry of information purportedly exists between the potential value of the company
concerned and its managers. The reason is that, although the managers are insiders having direct accessto internal information, shareholders are outsiders which do not have access to such information. Suchinformation asymmetry induces the managers having an information advantage, who know the true
value of their company, to perceive the actual market valuation as less than satisfactory. On thisassumption, the managers and buyout funds are likely to increase the premiums paid to squeezed out
This section used reports by Renneboog et al. (2007), Weston et al. (2004), Kitagawa(2007), and others as references.

42

shareholders because (the managers expect that) the lower the market valuation, the greater the
potential for new value created by the buyout. In fact, many preceding studies of public-to-private
MBOs in the US and Europe have implicated undervaluation as a major source of acquisition
premiums (Travlos and Cornett 1993, Renneboog et al. 2007, Nose and Ito 2009, Inoue 2010).

Hypothesis 1: The more undervalued the stock price before acquisition, the higher theacquisition premium.

2.2. The tax benefit hypothesis
When an acquisition is funded by debt, additional interest paid is included in expenses, which aretax-deductible. This effect is called the “tax shield.” The resulting reduced tax expenses have been
regarded as an important source of acquisition premiums. Among the wide-ranging empirical studiesof acquisition premiums and tax shields, the most symbolic is the result of an examination by Kaplan(1989b). This analysis of 76 MBO cases in the US between 1980 and 1986 concludes that 21%–72%
of premiums paid to existing shareholders are explainable by the tax shield effect. Nose and Ito (2009)
specifically examined the amount of interest payments before buyouts and concluded that, despite theabsence of directly significant correlation between such payments and premiums, companies paying asmaller amount of interest (i.e., companies with larger room for tax deduction because of an increasein additional interest payments) were more likely to select public-to-private MBOs, suggesting thatthe tax shield effect constituted an important motive for PTP MBOs.
If the tax shield is a major motive to implement an MBO in Japan, as implied by the precedingstudies described above, then it is likely that companies with larger tax burdens and smaller interest
payments receive an increased tax shield effect, thereby raising the premiums.

Hypothesis 2: The greater the tax burdens are before acquisition and the smaller the interest
payments are, the higher the acquisition premium is.

2.3. The agency costs hypothesis
Managements in publicly listed firms with dispersed ownership may not pursue shareholderinterests since shareholding ratios of managements are usually low enough to cause the conflict ofinterest between shareholders and managers. One example of such cases is excessive investments
which bring negative NPV motivated by managers’ self-satisfaction or self-protection. MBOs may
alleviate such agency problems between shareholders and managers.

2.3.1. The incentive realignment hypothesis
3

As a result of an MBO the shareholding ratio of the management increases and ownership andcontrol might be reintegrated (i.e. incentive realignment). Thus, an increase in the management
shareholding ratio is likely to reduce the conflict of interest and raise manager’s effort level, which
delivers improvement in the future corporate value (Jensen and Meckling 1976). Part of expected
increment in corporate value might be used for premium payment. The study of Renneboog et al.
(2007) on UK companies in the period after the late 1990s verified that the lower the shareholding
ratio of the management before an MBO, the more likely the premium was to be relatively high, whichmeant that firms with more rooms to raise the management shareholding ratios would pay higher
premiums.

Hypothesis 3-1: The lower a management’s shareholding ratio before acquisition, the higher its
acquisition premium is.

2.3.2. The free cash flow hypothesis
MBOs might alleviate agency problems through the reduction in free cash flow. MBOs are one formof LBOs (Leveraged Buy-outs) which deter managements to invest on projects with negative NPV
through the reduction in free cash flows by the increase in interest payments (Jensen 1993). Thus,
firms with more free cash flows before MBO are expected to pay higher acquisition premiums since
they are susceptible to the disciplinary role of debt and likely to improve corporate values after MBO(Lehn and Poulsen 1989).

Hypothesis 3-2: The more a company holds free cash flow before acquisition, the higher its
acquisition premium is.

2.3.3. The buyout fund hypothesis
Buyout funds might alleviate agency problems by providing close monitoring as block shareholders(Shleifer and Vishney 1986). At the same time, they might contribute to raise corporate values throughthe provisions of knowledge and experiences in finance (Sugiura 2006). Xu (2011) picks up the caseof Kito which delisted from JASDAQ in 2003 by MBO and relisted on Tokyo Stock Exchange in 2007
and documents how Carlyle contributed to the business restructuring and overseas operations after
MBO by providing their operating engineering skills. Thus, in MBOs with buyout funds, future
incremental corporate values created by funds might be distributed to minority shareholders.

Hypothesis 3-3: In an MBO case where a buyout fund involved, an acquisition premium paid in
the case is higher than a case without.

4However, buyout funds are financial buyers as well. In that sense, they might try hard to lower
purchasing costs by cutting acquisition premiums.

2.4. The breach of trust hypothesis
The fourth source of acquisition premiums might derive from a loss of wealth of existing employees.
As noted in Shleifer and Summers (1988), the buyer of the company can earn a short-term profit byvoiding long-term agreements and through the use of “implicit contracts” such as seniority-based
wages established between the former management and existing workers. This argument speaks to aso-called “breach of trust.” The premium provided to shareholders agreeing to a TOB reflects theprospect of increased shareholder value after acquisition based on this “breach of trust.” It isnoteworthy that the premium is simply a wealth transfer from employees to shareholders and that it is
not based on any creation of net value.
Although the possibility of such a breach of trust is often examined in the context of a hostile
takeover (Gokhale et al. 1995, Canyon et al. 2001), it might occur also in the case of MBOs. Thismight be attributable to the following three reasons (Amess and Wright 2008). First is an increase in
the debt-to-equity ratio. If an MBO takes the form of LBO, then the reliance on debts increases, as
does the risk of bankruptcy, which also has the effect of weakening the employees’ bargaining power(Fox and Marcus 1992). Secondly, this causes the funding company to increase its monitoring. The
operation periods of funds are reportedly three to five years (Mitsusada and Shiraki, 2006: 22), which
is likely to exert pressure on management improvement also in such a short term. The third reason isan increase in the shareholding ratio of the managers. This functions as a management incentive andsimultaneously reduces the possibility of conflict of interest with shareholders (alignment effect),
while encouraging corporate management to maximize shareholder value as demanded by the fund.
For these reasons, a breach of trust might occur in the case of MBOs, 5 and the acquisition premiums
are presumably higher for companies having an excessive number of employees with high wages andallowing for management streamlining after acquisition by solving such problems.

Hypothesis 4: The greater the excess of employees and wages at a company before acquisition,
the higher the acquisition premium.

2.5. The listing costs hypothesis
Finally, the saved cost from going private transaction can be a source of acquisition premiums. The
costs of being listed consist of both direct and indirect costs including listing fees, audit fees, costs

Empirical studies outside Japan, however, found no significant decline in the numberof employees after acquisitions. Moreover, no case of breach of trust attributable to MBOs
has been reported (Kaplan 1989a, Smith 1990).
55related to shareholder meetings, costs of both mandatory and voluntary disclosure documentation suchas securities reports and IR documents. Also, in recent years, such listing costs have been increasing
due to introductions of quarterly report and internal control system obligatory by Financial
Instruments and Exchange Act. Delisted firms especially small firms and firms which rarely issued
equity chose cost saving as a reason for having gone private.
Although there are not many studies dealing with listing costs and acquisition premiums explicitly,
Renneboog et al. (2007) is an exceptional study. They show that firms listed on AIMs (Alternative
Investment Market), which require smaller listing fees and have lower disclosure standards, pay lower
acquisition premiums since cost savings from going private are limited for these firms.

Hypothesis 5: The greater the saved cost from going private, the higher its acquisition premiumis.

3. Method of Analysis and Data
3.1. Dataset
The sample used for the analysis consists of 101 cases in which a PTP MBO was announced between
fiscal 2000 and 2011. The data originate in the cases categorized as private-to-public MBOs from
“MARR M&A Data CD-ROM” of RECOF Corp. The stock price, financial, and shareholder
composition data were extracted from Nikkei NEEDS-Financial QUEST. Many explanatory variables
are based on data from the prior year, and consolidated data were used whenever available; otherwise,
the analysis used non-consolidated data related to companies and ownership structures.

3.2. Method of analysis and variables
To analyze the determinants of acquisition premiums in PTP MBOs, we will estimate a linear
regression model by OLS with acquisition premiums as the explained variables and the following
factors based on the hypothesis in the second section as explanatory variables.

(1) Explained variable
PREM20; PREM40: The explained variables are acquisition premiums. Methods of two types
were used for the measurement. Comparisons were made between the TOB price and the values at 20
days and 40 days before the announcement. In addition to control premiums generated by increased
shareholding ratio as in ordinary acquisitions, acquisition premiums in PTP MBOs are thought toinvolve those associated with an increase in corporate value based on factors specific to MBOs suchas the factors described in the second section.
6

(2) Explanatory variables
Variable for undervaluation: In reference to Renneboog et al. (2007), SHPF, price earnings ratios
standardized with the market index, were used as a variable for Hypothesis 1, “the more undervalued
the stock price of the company concerned, the higher the potential for value created through MBO,
and thus, the larger acquisition premium.” As the indices, two types, are used: SHPF, which isdetermined by subtracting the earnings ratio of the market index (TOPIX) for the same period fromthe price earnings ratio calculated from the stock price (closing) at 300 days before the announcementof MBO and the stock price (closing) at 41 days before the announcement; and price-to-book ratio,
PBR. These variables denote the level of undervaluation of the company in the stock market. The
expected conditions of the sign are negative.

Variables for tax shield: The variables for Hypothesis 2––the larger the tax burdens before acquisition
and the smaller the interest payments are, the higher the acquisition premium is––are the interest-paidto-sales ratio (“INTEREST”) and the debt-to-total-assets ratio (“DEBT”). Companies paying lessinterest might generate higher acquisition premiums based on a higher potential for an increase inadditional interest payments. Also, firms with low leverage before acquisition have room to increasedebt and might pay higher premiums. The expected signs are therefore negative.

Variables for agency costs: Hypothesis 3, which states that the reduction of agency cost throughMBOs is a source of acquisition premiums, consists of three hypotheses. First hypothesis is on
incentive realignment which is based on the notion that an increase in the shareholding ratio of the
management as a result of an MBO is likely to reduce the conflict of interest between shareholders
and corporate managers. In this case, a lower shareholding ratio of the managers increases the room
for improvement in the agency cost, which is expected to increase the premium. This study uses
directors’ shareholding ratio as a proxy variable for the management’s shareholding ratio.
Second hypothesis is on free cash flow which is based on the notion that MBOs alleviate agency
problems through the reduction in free cash flow. We test the hypothesis by focusing on pre-MBO free
cash flow ratio. The free cash flow ratio FCF is defined as “LQ × liquidity on hand / total assets,”
where LQ is the dummy variable that takes value 1 when Tobin's q (simple q: stock price market cap.
+ total interest-bearing debts / total assets) is 1 or fewer and liquidity on hand is defined as cash anddeposits + securities + investment securities. Liquidity on hand of companies with less growthpotential more easily becomes free cash flow. Thus, firms with more free cash flows before MBO havegreater room for improvement in corporate values, which is expected to increase the premium. The
sign expected from the hypothesis positive.
Third hypothesis is on the role of buyout funds. The dummy variable FUND that takes value 1 when7

a buyout fund involves in an MBO is used to verify the hypothesis. A buyout fund might have two
opposite roles; one possibility is that it acts as a block shareholder, who provides intensive monitoring,
and also provides financial knowhow to improve corporate values. Another possibility is that it acts
as a financial buyer who tries hard to lower purchasing costs by cutting acquisition premiums.

Variables for employees: Sales per employee (“SALES”) and labor expenses per employee(“LABOR”) are used to verify Hypothesis 4 on the wealth transfer from employees that the more
excessive the employees and wages the company is facing before acquisition, the higher theacquisition premium. For both variables, adjustment among industries is made by reducing the medianin the same industry. 6 SALES presumably expresses excessive employees and LABOR excessive
wages. The expected sign is negative because of the low productivity per employee of companies
having excessive employees, in which productivity should be increased by reducing their employees.
Companies paying excessive wages are expected to be capable of creating an acquisition premium on
the assumption of cutting wages after an MBO. The expected sign is positive.

Variables for listing costs: The number of traded days ratio (“TRADED”) and the emerging stock
market dummy variable (“EMERGMKT”) are used as the variables to verify Hypothesis 5 which isbased on the notion that the saved cost from going private transaction can be a source of acquisition
premiums. TRADED is the ratio of the number of days share of an MBO firm was actually traded
between 250 and 41 days before the announcement of MBO. The smaller the ratio is, the higher thecost of being listed is. The expected sign is therefore negative. EMERGMKT is dummy variable thattakes value 1 when an MBO firm was listed on either Hercules, JASDAQ or Mothers before MBO.
Since costs of being listed on these stock markets for emerging firms should be smaller, cost savings
from going private are limited for the firms listed on the markets before MBOs. The expected sign istherefore negative.

Control variables: Furthermore, the logarithm of the acquisition price (“DEAL”), the manufacturer
dummy (“MANUFAC”) that gives value 1 to companies in the manufacturing industry, and fiscal year
dummy (“YEAR”) are added as control variables.

We will review the basic characteristics of acquisition premiums before moving on to a specificempirical analysis. The value of average premium paid by PTP companies is 57.6% based on acomparison between the value 20 days before the announcement and TOB price and 56.0% based on
the value 40 days before the announcement (Table 1). This not only exceeds the range acknowledged
as normal market value in Japan (20% of six-month-average stock price before MBO), but is
6

The Nikkei Industrial Classification was used to designate industrial categories.
8comparable to the premium (56.0%) of the MBO sample of US companies studied by Lowenstein(1985), which is considered relatively high, even among the values obtained in preceding studies of
the US and UK (Table 2). 7– Table 1 about here –– Table 2 about here –What are the factors, then, that influence the acquisition premium? The next section will identify
them based on regression analysis of the assumption of the hypotheses presented in the second section.

4. Results of Estimation
Results of the estimation are presented in Table 3. Estimation results in columns (1) - (3) used
PREM 20 as the explained variable and those in columns (4) - (6) used PREM 40 as the explained
variable.
– Table 3 about here –We first consider Hypothesis 1 that the more undervalued the stock price of the company concerned,
the higher the potential for value created through MBO, which explains the larger acquisition premium.
The price-earnings ratio SHPF and the price-to-book ratio PBR are employed to capture the level ofundervaluation of the company in the stock market. SHPF takes negative coefficients on all the models
with significance levels 5% or lower. PBR also has a negative effect on the premium index of two
types, but compared to SHPF the effect is weaker. In other words, Hypothesis 1 is supported.
Regarding the tax shield based on an increase in debt-to-equity ratio associated with MBO,
theoretically, the larger the tax burdens and the smaller the interest payments, the higher the acquisition
premium, as stated in Hypothesis 2. The interest-paid-to-sales ratio INTEREST and the debt-to-totalassets ratio DEBT are employed to test the hypothesis. Although INTEREST takes a negative
coefficient at 10% significance level as the hypothesis suggests (column 1), all other models suggest,
however, that these variables have significant effect on the premium indices. Thus, this analysis did
not demonstrate any relevance that the tax shield through increased debts was used as a source ofacquisition premiums.
The first agency costs hypothesis is on incentive realignment which is that an increase in the
Reasons that the values of premiums in this study exceed the results of measurements
performed in overseas preceding studies might include 1, excessive premiums paid inJapan attributable to optimistic risk assessment of management based on inadequate
practical experience in M&As (Hattori 2008; 75) and 2, excessive response of companies
aiming for going-private transactions to the successive litigation cases over stock
purchase prices, encouraging them to pay high premiums to facilitate smoothacquisitions. These, however, are beyond the scope of examination in this study, and are
therefore not explained any further.

7

9

shareholding ratio of the management as a result of an MBO is likely to reduce the conflict of interest
between shareholders and corporate managers. The coefficient of directors’ shareholding ratio DIREC
takes significantly negative coefficients in columns 1 and 4. This fact implies that companies withlarger room for reduction of agency cost between shareholders and the management associated withincreased directors’ shareholdings after MBO pay higher premiums. The second agency costs
hypothesis is on free cash flow which states that firms with more free cash flows before MBO havegreater room for improvement in corporate values, which is expected to increase the premium. The
free cash flow ratio FCF was not statistically significant, and the accumulated level of free cash flow
before acquisition could not be confirmed as a source of premiums based on the analysis results
obtained in this study. The third agency costs hypothesis is on the role of buyout funds. The dummy
variable FUND takes significantly negative coefficients when PREM 20, for which the reference stock
price for premium calculation is set at 20 days before the announcement, is used as the explained
variable. This fact implies that in MBOs with a buyout fund acquisition premiums are set lower due
to the financial buyer side of buyout funds.
Hypothesis 4 related to the wealth transfer from employees––the more excessive employees andwages the company is facing before acquisition, the higher the acquisition premium––was verified
using sales per employee, SALESPW, and labor expenses per employee, LABORPW. Companies
paying their employees high salaries might create acquisition premiums by voiding their implicit
contracts after MBOs. The estimation did not show any significant relation between both LABORPWand SALESPW and the premium indices.
The number of traded days ratio (“TRADED”) and the emerging stock market dummy variable(“EMERGMKT”) are used as the variables to verify Hypothesis 5 which is based on the notion thatthe saved cost from going private transaction can be a source of acquisition premiums.
Regarding Hypothesis 5 which is based on the notion that the saved cost from going private transaction
can be a source of acquisition premiums, either the number of traded days ratio TRADED or the
emerging stock market dummy variable EMERGMKT does not show significant effect on acquisition
premiums. Thus, this analysis did not demonstrate any relevance that the cost savings through MBOs
was used as a source of acquisition premiums.

5. Conclusion
This study examined the sources of acquisition premiums in the public-to-private type of MBOs
implemented by Japanese companies by testing the following five hypotheses emphasized in thepreceding studies including 1) the undervaluation hypothesis, 2) the tax benefit hypothesis, 3) the
agency costs hypothesis, 4) the breach of trust hypothesis, and 5) the listing costs hypothesis. The
10

analysis produced the following findings.
First, measurement of the level of acquisition premiums revealed addition of more than 50% to thestock prices at 20 days or 40 days before the TOB announcement, which is a level that is comparable
to those in of US and UK companies. Secondly, regression analysis using acquisition premiums as the
explained variable indicated a significantly negative coefficient of the price-earnings ratio before
MBOs and PBR, suggesting that companies of which stocks are undervalued before going private tend
to pay higher premiums. Thirdly, companies with larger room for reduction of agency cost between
shareholders and the management associated with increased directors’ shareholdings after MBO pay
higher premiums. This result implies that the reduction of agency cost through incentive realignmentis a source of acquisition premiums. Fourthly, regarding the role of buyout funds on MBOs, weobserved the financial buyer side of buyout funds who try to lower purchasing costs rather thanalleviating agency problems by providing close monitoring as block shareholders or providing
financial knowhow to improve corporate values.
Finally, there are issues remaining in this study. This study used data only of those companies that
implemented public-to-private MBOs as the sample, which might be susceptible to sample selection
bias. Therefore, companies not in MBOs must also be included in the sample using such techniques
as a paired sample. Regarding the effects of the involvement of buyout funds, we just took into accountthe existence of involvement without considering characteristics of the funds. Including informationsuch as past experiences on MBO cases and type of funds, e.g. foreign-affiliated vs. domestic, financial
institution-affiliated vs. independent, etc. in the analysis is expected to be meaningful.

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Shleifer, A. and C. H. Summers (1988), “Breach of Trust in Hostile Takeovers,” in A. J. Auerbach(ed.), Corporate Takeovers: Causes and Consequences, Chicago, IL: University of Chicago Press.
Shleifer, A. and R. Vishiny (1986), “Large Shareholders and Corporate Control,” Journal of Political
Economy, 94, pp.461-488.
Smith, A. (1990), “Corporate Ownership Structure and Performance: The Case of Management Buyouts, Journal of Financial Economics, 27, pp.143-164.
Sugiura, K. (2006) “Japanese Buyout Funds’ Principle of Investment,” Toyo University Graduate
School Bulletin. 42, pp. 215-238. (Japanese)
Travlos, N. G. and M. M. Cornett (1993), “Going Private Buyouts and Determinants of Shareholders’
Returns,” Journal of Accounting, Auditing & Finance, 8, pp.1-25.
Usui, A. (2001) “MBO (Kigyou Kachi Souzou No Atarashii Kata) (New type of corporate value
creation)” M&A 21 Seiki 2 Baryuu Keiei No M&A Toushi (M&A 21st century 2 M&A investment ofvalue management). Usui, A. (ed.) Chuo Keizai-Sha, Inc. pp.35-69. (Japanese)
Weston, J. F., M. Mitchell and J. H. Mulherin (2004), Takeovers, Restructuring, and Corporate
Governance, Prentice Hall.
Xu, P. (2011) “Formation of the Market for Corporate Control in Japan: Focusing on MBO” Corporate
Governance in Japan. Miyajima, H. (ed.) Toyo Keizai-Sha, Inc. pp.151-177. (Japanese)
Yoshimura, K. (2010) “MBO and Wealth of Minority Shareholders.” Accounting (Kigyokaikei). 62(10), pp. 83-94. (Japanese)

13

Figure 1: Japanese MBO Market（Number of cases）(in 100 million yen)
8,000

90
Value (other)

7,000

80

Value (PTP)
70

Number (PTP)

6,000

Number (other)

60

5,000
50
4,000
40
3,000
30
2,000

20

1,000

10

0

0
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

（Year）

Note: “PTP” in the graph denotes the value and number of public-to-private MBOs; “other” denotes
the value and number of MBOs of types other than public-to-private.
Source: Prepared by the author based on “MARR M&A Data CD-ROM” of RECOF Corp.

14

Table 1: Descriptive Statistics
Variable
PREM20
PREM40SHPF
PBRINTEREST
DEBT
DIREC
FCF
FUND
SALESPWLABORCOST
TRADED
EMERGMKTDEALSIZEMANUFACDACC
DOWNADJ

Mean
Std. Dev.
0.576
0.403
0.560
0.378
-0.098
0.237
0.936
0.713
0.016
0.044
1.509
2.766
0.140
0.133
0.195
0.187
0.495
0.502
5.758
39.746
0.332
3.508
0.819
0.237
0.604
0.492
8.858
1.374
0.366
0.484
-0.001
0.056
0.347
0.478

Min
0.008
0.053
-0.609
0.177
0.000
0.067
0.000
0.000
0.000
-53.015-6.492
0.166
0.000
5.451
0.000
-0.1740.000

Note: The sample size is 101 companies.

15

Max
2.229
2.217
0.613
3.487
0.407
25.059
0.694
0.596
1.000
268.31218.0911.000
1.000
12.513
1.000
0.221
1.000

Table 2: Results of preceding studies of acquisition premiums in public-to-private MBOs
SourcePeriodCountryType

DeAngelo et al. (1984)

1973-1980

US

ALL

Lowenstein (1985)

1979-1984

US

MBO

Lehn and Poulsen (1989)

1980-1987

US

ALL

Amihud (1989)

1983-1986

US

MBO

Kaplan (1989a, b)

1980-1985

US

MBO

Asquith and Wizman (1990)

1980-1988

US

ALL

Harlow and Howe (1993)

1980-1989

US

ALL

Travlos and Cornett (1933)

1975-1983

US

ALL

Easterwood et al. (1994)

1978-1988

US

MBO

Weir et al. (2005)

1998-2000

UK

ALL

Renneboog et al. (2007)

1997-2003

UK

MBO

Reference
Stock Price

N

Avg.
Premium (%)

72

56.3

28

56.0

257

36.1

15

42.9

2 months
earlier76

42.3

1 day earlier

47

37.9

121

44.9

56

41.9

184

32.9

95

44.9

137

40.6
39.1

40 daysearlier
30 daysearlier
20 daysearlier
20 daysearlier

20 daysearlier
1 monthearlier
20 daysearlier
1 monthearlier
40/20 days
earlier

Note 1: “Reference stock price” denotes the stock price before the announcement of going private, which will be compared to
the TOB price.
Note 2: “ALL” means the overall public-to-private cases, and “MBO” means that the sample is limited to MBOs.
Source: Table 6 in Renneboog et al. (2007). The result of Renneboog et al. (2007) itself is also added.

16

Table 3: Determinants of Acquisition Premiums

SHPF

(1)
-0.388***(0.134)PBR
INTEREST
DEBT
DIREC
FCF
FUND
SALESPWLABORCOST
TRADED
EMERGMKTDEALSIZEMANUFACCONSTANT
Year Dummy
Observations
R-squared-6.884*(3.893)0.103(0.068)-0.649**(0.312)0.253(0.165)-0.205**(0.094)0.000(0.001)-0.005(0.011)
0.255(0.174)-0.015(0.081)-0.042(0.044)0.110(0.080)0.675(0.439)
Yes
101
0.509

PREM20(2)-0.144*(0.079)-5.905(3.735)0.093(0.065)-0.544(0.347)0.067(0.188)-0.168*(0.096)0.000(0.001)-0.001(0.011)
0.233(0.171)0.040(0.080)-0.019(0.054)0.004(0.081)0.710(0.459)
Yes
101
0.495

(3)
-0.388***(0.135)-0.144*(0.073)-6.328(3.808)0.097(0.066)-0.510(0.339)0.075(0.183)-0.177*(0.093)0.000(0.001)-0.005(0.011)
0.236(0.164)-0.006(0.082)-0.009(0.051)
0.063(0.076)0.633(0.440)
Yes
101
0.531

(4)
-0.429**(0.167)-6.058(3.750)0.086(0.064)-0.524*(0.314)0.029(0.163)-0.127(0.084)-0.001(0.001)-0.006(0.008)0.294(0.190)-0.032(0.081)-0.065(0.041)
0.079(0.092)0.780*(0.421)
Yes
101
0.428

PREM40(5)-0.114(0.073)-5.149(3.660)0.077(0.062)-0.452(0.336)-0.121(0.189)-0.094(0.090)0.000(0.001)-0.001(0.008)0.276(0.186)0.025(0.084)-0.050(0.048)-0.024(0.094)0.831*(0.438)
Yes
101
0.395

(6)
-0.429**(0.169)-0.114*(0.066)-5.617(3.700)0.081(0.062)-0.414(0.332)-0.112(0.182)-0.105(0.086)0.000(0.001)-0.006(0.008)0.279(0.184)-0.025(0.080)-0.039(0.046)0.041(0.090)0.746*(0.421)
Yes
101
0.444

Note 1: Values in the parentheses are heteroskedasticity-robust standard error.
Note 2: *, **, and *** denote that they are significant at significance levels 10%, 5%, and 1%,
respectively.

17