Buy-Outs, Divestment, and Leverage: Restructuring Transactions and Corporate Governance
This paper examines the role of buy-outs, divestment and other restructuring transactions as devices which may counter acknowledged weaknesses in the market for corporate control relating to managerial entrenchment strategies, acquisitions motivated by managerial interests, inadequate information availability to outside bidders and free-riding by target shareholders. Such devices strengthen corporate governance through informed management achieving significant equity ownership, high leverage to force management to seek profitable projects or pay out free cash flow and/or divest assets. Evidence reviewed in the paper shows that, on balance, restructuring transactions have a positive impact on performance at least in the short term. However, there remains considerable debate as to whether buy-outs in particular are long term or merely transitory structures. There is increasing evidence to suggest that the longevity of buy-outs is bi-modal--some change quickly, many remain as buy-outs for long periods. Copyright 1992 by Oxford University Press.
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