LBOs, debt and R&D intensity

This paper deals with the impact of debt on R&D intensity for firms undergoing a leveraged buyout (LBO). We develop seven hypotheses based on capital market imperfection theories and agency theory. To test these hypotheses, we compare 72 R&D performing LBOs with 3329 non‐LBO control observations and 126 LBOs with little or no R&D expenditures. The regressions yield four statistically significant major findings. First, pre‐LBO R&D intensity is roughly one‐half of the overall manufacturing mean and two‐thirds of the firm's industry mean. Second, LBOs cause R&D intensity to drop by 40 percent. Third, large firms tend to have smaller LBO‐related declines in R&D intensity. Fourth, R&D intensive LBOs outperform both their non‐LBO industry peers and other LBOs without R&D expenditures.