MANAGERIAL DISCRETION, ORGANIZATIONAL-STRUCTURE, AND CORPORATE PERFORMANCE - A STUDY OF LEVERAGED RECAPITALIZATIONS

We examine the impact of highly leveraged transactions on managerial discretion over investment policy using a sample of 39 proposed leveraged recapitalizations. We find significant decreases in undistributed cash flow, capital expenditures, and total assets following completed recapitalizations. The reductions in investment are significantly correlated with the cumulative abnormal returns earned by the shareholders of the recapitalizing firms. Moreover, we find evidence of poor investment decisions on the part of the sample firms in the years leading up to the recapitalizations. The overall results are consistent with the hypothesis that increased debt plays a valuable role in limiting managerial discretion.