The impact of corporate governance mechanisms on value increase in leveraged buyouts

Using a novel, hand-collected dataset, comprising 321 exited buyouts in the UK in the period 1995 to 2004, this study examines the realized value increase in exited leveraged buyouts. Testing the free cash flow theory, we show that value increase and return characteristics of LBOs are to some extent related to the corporate governance mechanisms resulting from a leveraged buyout, especially managerial equity holdings. We show that return characteristics and the probability of a positive return are mainly related to size of the buyout target and acquisitions carried out during the holding period. Furthermore, we find that the return characteristics between insider driven buyouts and outsider driven buyins are different.