Determinants of the stock price reaction to leveraged buyouts |
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Authors: | Kenneth A Carow Dianne M Roden |
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Institution: | (1) School of Business, Indiana University, 801 West Michigan Street, 46202-5151 Indianapolis, IN;(2) Division of Business and Economics, Indiana University Kokomo, 2300 South Washington Street, 46904-9003 Kokomo, IN |
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Abstract: | Abtract 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. Howerver, 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. |
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