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Undervaluation and private equity takeovers

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Australian Journal of Management

Published online on

Abstract

Undervaluation is often offered as an important consideration in private equity transactions. This study analyzes the importance of undervaluation, vis-à-vis information asymmetry, as a determining factor in ‘going-private’ transactions in Australia. Using a matched sample of firms from 1990 to 2012, we test a predictive choice model. The empirical results show that market undervaluation is a dominant factor in private equity takeovers. These results are robust to alternative measures of valuation, prevailing market conditions, money flows and subperiods.

JEL Classification: G11, G15