Finance

This paper investigates the determinants of leveraged buyout (LBO)activity by comparing firms that have implemented LBOs to those that have not. The analysis considers sources of gains from LBOs as well as the costs that can arise from the large amount of debt included in their financial strutures. Consitent with the free cash flowe 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. In addion, firms likely to have high costs of financial distress (e.g. firms with high R&D expenditures), are less likely to do LBOs.