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How Risky is the Debt in Highly Leveraged Transactions? Evidence from Public Recapitalizations

  • Steven N. Kaplan
  • Jeremy C. Stein

This paper presents estimates of the systematic risk of the debt in public leveraged recapitalizations. We calculate the systematic risk of the debt as a function of the difference between the systematic equity risk before and after the recapitalization. The increase in equity risk is surprisingly small after a recapitalization, ranging from 28% to 52% depending on the estimation method. Under the assumption that total company risk is unchanged, the implied systematic risk of the post-recapitalization debt in twelve transactions averages 0.67. Under the alternative assumption that the entire market adjusted premium in the leveraged recapitalization represents a reduction in fixed costs, the implied systematic risk of this debt averages 0.42.

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File URL: http://www.nber.org/papers/w3390.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3390.

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Date of creation: Jun 1990
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Publication status: published as "How Risky is the Debt in Highly Leveraged Transactions?" From Journal of Financial Economics, Vol. 27, No. 1, pp. 215-245, (October 1990).
Handle: RePEc:nbr:nberwo:3390
Note: ME
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  1. Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-22, September.
  2. Steven Kaplan, 1989. "Management Buyouts: Evidence on Taxes as a Source of Value," Journal of Finance, American Finance Association, vol. 44(3), pages 611-632, 07.
  3. Baldwin, Carliss Y & Mason, Scott P, 1983. " The Resolution of Claims in Financial Distress: The Case of Massey Ferguson," Journal of Finance, American Finance Association, vol. 38(2), pages 505-16, May.
  4. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
  5. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
  6. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  7. Kaplan, Steven, 1989. " Management Buyouts: Evidence on Taxes as a," Journal of Finance, American Finance Association, vol. 44(3), pages 611-32, July.
  8. Jensen, Michael C, 1988. "Takeovers: Their Causes and Consequences," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 21-48, Winter.
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