The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs

The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs ABSTRACT This paper investigates the determinants of leveraged buyout (LBO) activity by comparing firms that have implemented LBOs to those that have not. Consistent with the free cash flow theory, we find that firms that initiate LBOs can be characterized as having a combination of unfavorable investment opportunities (low Tobin's q) and relatively high cash flow. LBO firms also tend to be more diversified than firms which do not undertake LBOs. In addition, firms with high expected costs of financial distress (e.g., those with high research and development expenditures) are less likely to do LBOs. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs

The Journal of Finance, Volume 48 (5) – Dec 1, 1993

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Publisher
Wiley
Copyright
1993 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1993.tb05138.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper investigates the determinants of leveraged buyout (LBO) activity by comparing firms that have implemented LBOs to those that have not. Consistent with the free cash flow theory, we find that firms that initiate LBOs can be characterized as having a combination of unfavorable investment opportunities (low Tobin's q) and relatively high cash flow. LBO firms also tend to be more diversified than firms which do not undertake LBOs. In addition, firms with high expected costs of financial distress (e.g., those with high research and development expenditures) are less likely to do LBOs.

Journal

The Journal of FinanceWiley

Published: Dec 1, 1993

References

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