The Journal of Finance

The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05138.x

TIM OPLER, SHERIDAN TITMAN

This paper investigates the determinants of leveraged buyout (LBO) activity by comparing firms that have implemented LBOs to those that have not. Consistent with the free cash flow theory, we find that firms that initiate LBOs can be characterized as having a combination of unfavorable investment opportunities (low Tobin's q) and relatively high cash flow. LBO firms also tend to be more diversified than firms which do not undertake LBOs. In addition, firms with high expected costs of financial distress (e.g., those with high research and development expenditures) are less likely to do LBOs.

The Determinants of the Maturity of Corporate Debt Issues

Published: 12/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb05227.x

JOSE GUEDES, TIM OPLER

We document the determinants of the term to maturity of 7,369 bonds and notes issued between 1982 and 1993. Our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum, while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum. This pattern is consistent with the theory that risky firms do not issue short‐term debt in order to avoid inefficient liquidation, but are screened out of the long‐term debt market because of the prospect of risky asset substitution.

Financial Distress and Corporate Performance

Published: 07/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb00086.x

TIM C. OPLER, SHERIDAN TITMAN

This study finds that highly leveraged firms lose substantial market share to their more conservatively financed competitors in industry downturns. Specifically, firms in the top leverage decile in industries that experience output contractions see their sales decline by 26 percent more than do firms in the bottom leverage decile. A similar decline takes place in the market value of equity. These findings are consistent with the view that the indirect costs of financial distress are significant and positive. Consistent with the theory that firms with specialized products are especially vulnerable to financial distress, we find that highly leveraged firms that engage in research and development suffer the most in economically distressed periods. We also find that the adverse consequences of leverage are more pronounced in concentrated industries.

Block Share Purchases and Corporate Performance

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.244195

Jennifer E. Bethel, Julia Porter Liebeskind, Tim Opler

This paper investigates the causes and consequences of activist block share purchases in the 1980s. We find that activist investors were most likely to purchase large blocks of shares in highly diversified firms with poor profitability. Activists were not less likely to purchase blocks in firms with shark repellents and employee stock ownership plans. Activist block purchases were followed by increases in asset divestitures, decreases in mergers and acquisitions, and abnormal share price appreciation. Industry‐adjusted operating profitability also rose. This evidence supports the view that the market for partial corporate control plays an important role in limiting agency costs in U.S. corporations.