Jonathan B. Cohn, Lillian F. Mills & Erin Towery (all of University of Texas, McCombs School of Business), The Evolution of Capital Structure and Operating Performance after Leveraged Buyouts: Evidence from U.S. Corporate Tax Returns:

This study uses U.S. corporate tax return data to examine the evolution of firms’ financial structure and performance after leveraged buyouts for a comprehensive sample of 317 LBOs taking place between 1995 and 2007. We find that improvements in operating performance subsequent to an LBO are small and are concentrated among firms that performed poorly pre-LBO. We also find that firms, on average, do not reduce their leverage after an LBO, even if they generate cash flow in excess of their investment needs. Our results suggest that private equity firms use debt in LBOs primarily to effect one-time changes in the target firm’s capital structure rather than simply as an efficient means of financing transactions.