Bondholder Wealth Effects of Management Buyouts

We study the impact of 29 management buyouts (MBOs) announced during the years 1981-1989 on the value of the firms outstanding nonconvertible bonds. Using two methodologies-market-adjusted retums and mean-adjusted returns we provide evidence confirming the presence of significant bondholder wealth losses of about 3% associated with the announcement of MBOs. This evidence is in conflict with that provided by Marais, Schipper, and Smith, but is consistent with the results of the recent studies by Asquith and Wizman, and Warga and Welch. The magnitude of the losses in our study is similar to that reported by Asquith and Wizman. For example, the set of our firms which contained no dividend and leverage restrictions experienced an average loss of 6.5%, whereas, for a similar partition, Asquith and Wizman reported an average loss of 5.2%. Our findings are not sensitive to the choice of methodology employed. Furthermore, our findings indicate that bond price reactions are sensitive to the presence of restrictive covenants and maturity.