Ownership Structure, Leverage, and Firm Value: The Case of Leveraged Recapitalizations

A comprehensive empirical examination of a relatively new form of leverage-increasing transaction known as a leveraged recapitalization (LR) is presented. Although similar to a leveraged buyout, the LR differs from LBOs in that the firm remains public instead of going private. We find significant positive abnormal returns to equity-holders, without losses to existing bondholders. We examine the financial characteristics of LR firms and find evidence in support of Jensen's free cash flow hypothesis.