Financial characteristics of leveraged buyouts

Abstract

Several testable hypotheses on the financial characteristics of firms that undergo leveraged buyouts (LBOs) are presented. The hypotheses are based on arguments of modern financial theory. Empirical results support Jensen's (1986) free cash flow hypothesis. Contrary to expectations, LBO firms have higher average levels of debt and operating efficiency before the buyout than do other firms. An attempt is also made, using a binary logit model, to predict which firm will undergo a LBO, on the basis of the firm's financial characteristics. Using a conditional maximum likelihood method, a split-sample technique, and a refined cutoff probability estimation, the prediction effort is generally successful. © 1992.