Determinants of the stock price reaction to leveraged buyouts

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. However, 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.