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Leverage Buyout - Success or failure? Investigating the impact of excessive leverage on operating efficiency for US. companies.

Hæstad, Theodor
Master thesis
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URI
https://hdl.handle.net/11250/3014250
Date
2022
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  • Master Thesis [4657]
Abstract
This thesis investigates the relationship between excessive leverage on operating efficiency

and lower debt levels. The period spans from 1990 - to 2018; however, the sample is

mainly concentrated around the mid-1990s up to the financial crisis. The thesis builds

on the foundation of agency theory to explain different types of behavior that make firms

eventually inefficient. These firms are presumed to experience severe agency costs, and

the requirement for discipline is best solved by incorporating the monitoring effect of debt.

Running regressions on different operating and financial performance measures shows no

evidence of relatively improved efficiency using higher debt levels.

Moreover, in analyzing differences in firm behavior, such as asset and revenue growth,

there is no evidence that excessive leverage has different firm behavior than using lower

debt levels. However, one compelling finding is that the firms seem to experience substantial

growth in assets and revenue post-transaction, contradicting Jensen's Free cash

flow hypothesis. The findings suggest that the motives for entailing leveraged buyout go

beyond simply improving efficiency. The motives for LBOs, change in attitudes when

incorporating excessive leverage and poor credit monitoring in bull markets, might help

explain why previous research does not systematically improve operating efficiency and

the history of leveraged buyouts.

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