Corporate Capital Structure Decisions: Evidence from Leveraged Buyouts

We analyze the composition of the finance packages used in a large sample of leveraged buyout transactions in order to test a set of hypotheses developed in the prior literature about the determinants of corporate capital structure decisions. We focus in particular on the role of the agency costs, bankruptcy risks, and tax considerations. We find evidence that all three have an impact, both on the degree of leverage employed in the transactions and on the attributes of the borrowings undertaken. The impacts are manifest in systematic relationships between the proportion and type of debt in the buyout financing package and the target firm's earnings rate, earnings variability, growth prospects, and its tax and liquidity position.