DIVESTMENTS AND FINANCIAL DISTRESS IN LEVERAGED BUYOUTS

This paper investigates the wealth effects of 134 divestments by 41 fi rms that underwent leveraged buyouts in the 1980s. Stock in these comp anies is privately owned. Bond returns for publicly traded debt are us ed to measure the wealth effects of the divestment announcement. These divestments are, on average, not associated with significant wealth e ffects for the full sample. However, firms that experience financial d istress have negative and significant abnormal returns associated with their divestments, while returns in non-event months are insignifican t. In contrast, non-distressed firms gain when asset sales are announc ed. The losses suffered by bondholders in distressed sellers are large and significant when core assets are divested. Bondholders in these f irms do not suffer significant losses when non-core assets are diveste d. Finally, abnormal bond returns are related to the structure of the firms' post-buyout debt. Returns are negatively related to the use of private debt in the capital structure and positively related to the us e of subordinated debt. (C) 1998 Elsevier Science B.V. All rights rese rved.