Abstract
Do leveraged buyout transactions increase the chance of bankruptcy? While corporate finance theory predicts that such sharp changes in capital structure increase financial distress costs by raising the probability of bankruptcy, previous studies fail to measure the effect. In this letter, we provide evidence that is consistent with the prediction of the theory. Tracking a sample of 484 leveraged buyouts and propensity score matched control firms for 10 years, we find that these transaction increase the probability of bankruptcy for the target firm by approximately 18%.
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