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

Tim Opler and Sheridan Titman

Journal of Finance, 1993, vol. 48, issue 5, 1985-99

Abstract: This paper investigates the determinants of leveraged buyout activity by comparing firms that have implemented leveraged buyouts to those that have not. Consistent with the free cash flow theory, the authors find that firms that initiate leveraged buyouts can be characterized as having a combination of unfavorable investment opportunities (low Tobin's q) and relatively high cash flow. Leveraged buyout firms also tend to be more diversified than firms that do not undertake leveraged buyouts. In addition, firms with high expected costs of financial distress (e.g, those with high research and development expenditures) are less likely to do leveraged buyouts. Copyright 1993 by American Finance Association.

Date: 1993
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