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Bondholder Losses In Leveraged Buyouts

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  • WARA, A.
  • WELCH, I.

Abstract

Announcements of successful leveraged buyouts (LBOs) during January 1985 to April 1989 caused a significantly negative return on outstanding publicly traded nonconvertible bonds. Yet the average risk-adjusted debt holder losses are less than 7 percent of the average risk-adjusted equity holder gains. Bond losses are related to the pre-LBO rating, but only weakly to equity holder gains. We demonstrate that trader-quoted data from a major investment bank offers conclusions about the effects of LBOs on debt holders different from those drawn from commonly used matrix and exchange-based data (such as Standard & Poor's Bond Guide data). This has important implications for event studies involving debt instruments. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
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Suggested Citation

  • Wara, A. & Welch, I., 1990. "Bondholder Losses In Leveraged Buyouts," Papers fb-_90-04, Columbia - Graduate School of Business.
  • Handle: RePEc:fth:colubu:fb-_90-04
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    References listed on IDEAS

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    1. Mas-Colell,Andreu, 1990. "The Theory of General Economic Equilibrium," Cambridge Books, Cambridge University Press, number 9780521388702, December.
    2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    3. Eckwert, Bernhard, 1993. "Allocative effects of financial assets and the long run neutrality of money when markets are incomplete," European Economic Review, Elsevier, vol. 37(1), pages 75-95, January.
    4. Stiglitz, Joseph E, 1974. "On the Irrelevance of Corporate Financial Policy," American Economic Review, American Economic Association, vol. 64(6), pages 851-866, December.
    5. Hellwig, Martin F, 1981. "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 71(1), pages 155-170, March.
    6. Gottardi Piero, 1994. "On the Non-neutrality of Money with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 62(1), pages 209-220, February.
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    Keywords

    risk ; data collecting ; wealth ; prices;

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