Can Tech and Debt Ever Marry? The Future of Leveraged Buyouts in the 21st Century

Abstract

This paper empirically examines the impact of debt on leveraged buyout performance. Research suggests that the use of debt financing to purchase a company can increase the value of the firm by improving corporate investment behavior and providing tax shields on interest payments. However, such a result depends on the underlying characteristics of the target company. Building from existing literature that suggests that leverage can lead high-growth firms to pass up value-creating projects, ultimately destroying firm value, I examine the impact of debt on returns to investors from leveraged buyouts of companies in the technology sector. I find that having greater leverage decreases the returns to buyouts of technology companies.