This paper examines the effect on stock and nonconvertible bond prices of going private buyout proposals and explores sources of stock price reaction. Three alternative sources of abnormal returns are analyzed: the elimination of stockholders' servicing cost, the capital structure changes resulting from borrowings to take the firm private, and the elimination of agency costs associated with the prebuyout ownership structure. The findings indicate that going private buyouts generate large benefits to the firms' owners by eliminating the agency costs prevailing in the firms prior to going private.
A Resource Based Interpretation of Performance Enhancing Capital Structure Changes: The O.M. Scott LBO Revisited
