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Steven N. Kaplan, Jeremy C. Stein
NBER Working Paper No. 3390 (Also Reprint No. r1602)*
Issued in September 1991
NBER Program(s): ME
---- Abstract -----
This paper presents estimates of the systematic risk of the debt in public
leveraged recapitalizations. We calculate the systematic risk of the debt as a
function of the difference between the systematic equity risk before and after
the recapitalization. The increase in equity risk is surprisingly small after
a recapitalization, ranging from 28% to 52% depending on the estimation method.
Under the assumption that total company risk is unchanged, the implied
systematic risk of the post-recapitalization debt in twelve transactions
averages 0.67. Under the alternative assumption that the entire marketadjusted
premium in the leveraged recapitalization represents a reduction in
fixed costs, the implied systematic risk of this debt averages 0.42.
*Published: "How Risky is the Debt in Highly Leveraged Transactions?" From Journal of Financial Economics, Vol. 27, No. 1, pp. 215-245, (October 1990).
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