Abstract
This paper investigates the determinants of leveraged buyout activity through the use of an abnormal return premium from the time of the first announcement through the final trading day. Consistent with the free. cash flow theory, firms with either high free cash flow or low Tobin’s q have higher abnormal returns. However, the returns to firms with both high free cash flow and low Tobin’s q are lower than firms with just one of these characteristics. Firms which substantially increase leverage and management buyouts with high insider ownership prior to the buyout have lower abnormal returns. Firms with lower risk, and therefore greater debt capacity, have higher abnormal returns.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Amihud, Y.Leveraged Management Buyouts. New York: Dow Jones Irwin. 1989.
Arzac, E. “On the capital structure of leveraged buyouts.”Financial Management 21 (1992): 16–26.
Asquith, P. and T. Wizman. “Event risk. covenants, and bondholder returns in leveraged buyouts.”Journal of Financial Economics 27 (1990): 195–213.
Bradley, M., A. Desai, and E. Kim. “The rationale behind interfirm tender offers: Information or synergy?”Journal of Financial Economics 11 (1983): 183–206.
Brown, C. and J. Medoff. “The impact of firm acquisitions on labor.” inCorporate Takeovers: Causes and Consequences, edited by A. Auerback. The University of Chicago Press. 1988.
Brown, S. and J. Warner. “Measuring Security Price Performance.”Journal of Financial Economics 8 (1980): 205–258.
Brown, S. and J. Warner. “Using Daily Stock Returns: The Case of Event Studies.”Journal of Financial Economics 14 (1985): 3–31.
Cook, D., J. Easterwood, and J. Martin. “Bondholder wealth effects of management buyouts.”Financial Management 21 (1992): 102–113.
DeAngelo, H., L. DeAngelo, and E. Rice. “Going private: Minority freezeouts and shareholder wealth.”Journal of Law and Economics 27 (1984): 367–402.
Easterwood, J., C. Hsieh, and R. Singer. “The motivation for going private.” Working paper. 1988.
Eun, C., R. Kolodny, and C. Scheraga. “Cross-border acquisitions and shareholder wealth: Tests of the synergy and internationalization hypotheses.”Journal of Banking and Finance 20 (1996): 1559–1582.
Gilson, R., M. Scholes, and M. Wolfson. “Taxation and the dynamics of corporate control: The uncertain case for tax-motivated acquisitions.” inKnights Raiders, and Targets: The Impact of the Hostile Takeover, edited by J. Coffee, Jr., L. Lowenstein, and S. Rose-Ackerman. New York: Oxford University Press, 1988.
Grammatikos, T. and I. Swary, “Incentives for public firms to go private: Superior information or organizational efficiency.” Working paper. 1986.
Hoshi, T., A. Kashyap, and D. Scharfstein. “The role of banks in reducing the costs of financial distress in Japan.” NBER Working Paper No. 3435. 1990.
Jensen, M. “Eclipse of the public corporation.”Harvard Business Review 67 (1989): 61–74.
Kaplan, S. “Management buyouts: Evidence on taxes as a source of value.”Journal of Finance 44 (1989): 611–632.
—. “The effects of management buyouts on operating performance and value.”Journal of Financial Economics 24 (1989): 217–254.
—, “The staying power of leveraged buyouts.”Journal of Financial Economics 29 (1991): 287–313.
Kaplan, S. and J. Stein. “The evolution of buyout pricing and financial structure in the 1980s.”Quarterly Journal of Economics 108 (1993): 313–357.
Lee, C., S. Rosenstein, N. Rangan and W. Davidson. “Board composition and shareholder wealth: The case of management buyouts.”Financial Management 21 (1992): 58–72.
Lehn, K. and A. Poulsen. “Free cash flow and stockholder gains in going private transactions.”Journal of Finance 44, (1989): 771–787.
Lowenstein, L. “Management buyouts.”Columbia Law Review 85 (1985): 730–784.
Marais, L., K. Schipper and A. Smith, “Wealth effect of going private for senior securities.”Journal of Financial Economics 23 (1989): 155–191.
Opler, T. “Operating performance in leveraged buyouts: Evidence from 1985–1989.”Financial Management 21 (1992): 27–34.
—. “Controlling financial distress costs in leveraged buyouts with financial innovations.”Financial Management 22 (1993): 79–90.
Opler, T. and S. Titman. “The determinants of leveraged buyout activity: Free cash flow vs. financial distress costs.”Journal of Finance 48 (1993): 1985–1999.
Roden, D. and W. Lewellen. “Corporate capital structure decisions: Evidence from leveraged buyouts.”Financial Management 24 (1995): 76–87.
Schipper, K. and A. Smith. “Corporate income tax effects of management buyouts.” University of Chicago. Working paper. 1988.
Travlos, N. and M. Cornett. “Going private buyouts and determinants of shareholders’ return.”Journal of Accounting, Auditing, and Finance (1990): 1–25.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Carow, K.A., Roden, D.M. Determinants of the stock price reaction to leveraged buyouts. J Econ Finance 21, 49–59 (1997). https://doi.org/10.1007/BF02929038
Issue Date:
DOI: https://doi.org/10.1007/BF02929038