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The origin, ownership and use of cash flows in leveraged buyouts

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  • Ayash, Brian

Abstract

This paper uses cash flow statements to study leveraged buyouts between 1980 and 2006 of large publicly traded U.S. firms by private equity funds. Presenting the origin, ownership and use of cash in these transactions, I show that once they are controlled by private equity funds, these firms exhibit a significant decline in investment and growth. I also use cash flow statements to evaluate the free cash flow proxies frequently used in the literature and show that the gains in free cash flows are due to a significant reduction in investment post-LBO and not operating improvements. The leveraged capital structure forces a change in investment philosophy, which is reflected in lagged declines in growth rates.

Suggested Citation

  • Ayash, Brian, 2020. "The origin, ownership and use of cash flows in leveraged buyouts," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 286-295.
    • Handle: RePEc:eee:quaeco:v:77:y:2020:i:c:p:286-295
    DOI: 10.1016/j.qref.2019.10.004
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    References listed on IDEAS

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    Cited by:

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    2. Jonathan Taglialatela & Roberto Barontini & Francesco Testa & Fabio Iraldo, 2024. "Blockholders and the ESG performance of M&A targets," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 28(2), pages 625-650, June.
    3. Dridi, Ichrak & Boughrara, Adel, 2021. "On the effect of full-fledged IT adoption on stock returns and their conditional volatility: Evidence from propensity score matching," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 179-194.

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    More about this item

    Keywords

    Leveraged buyouts; Growth equity buyouts; Investment; Private equity;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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