Highly leveraged transactions and managerial discretion over investment policy: An overview

Abstract

These discussion comments place the evidence by Denis and Denis on leveraged recapitalizations in the broader context of highly leveraged transactions, including going-private transactions, management buyouts, and so-called reverse LBOs. The evidence indicates that highly levered companies that remain publicly-owned experience improvements in operating performance and reductions in capital expenditures following the leverage boost comparable to those of companies that have gone private. Despite increases in operating income, however, the obligations of the additional debt taken on are sufficient to preclude management from internally financing capital expenditures at previous levels. There is evidence consistent with the claim that this limitation benefits stockholders.