Bondholder Losses in Leveraged Buyouts Arthur Warga University of Wisconsin-Milwaukee Ivo Welch University of California,Los Angeles Announcements of successful leveraged buyouts (LBOs)during January 1985 to April 1989 caused a significantly negative return on outstanding publicly traded nonconvertible bonds.Yet the average risk-adjusted debt bolder losses are less than 7 percent of the average risk-adjusted equity bolder gains.Bond losses are related to the pre- LBO rating,but only weakly to equity bolder gains. We demonstrate that trader-quoted data from a major investment bank offers conclusions about the effects of LBOs on debt bolders different from tbose drawn from commonly used matrix and excbange-based data (sucb as Standard Poor's Bond Guide data).Tbis bas important implica- tions for event studies involving debt instruments. The effect of leveraged buyouts (LBOs)on the wealth of target shareholders has received extensive study. We wish to thank an anonymous referee,Ed Altman (a referee),Paul Asquith Bernard Black,Michael Brenan,David Hirshleifer,Gailen Hite,Laurentius Marais,Annette Poulsen,Matthew Spiegel,Richard Sweeney,Sheridan Tit- man,and especially both the Editor Stephen Brown and Managing Editor Chester Spatt for helpful comments.Seminar participants at New York Uni versity,Columbia University,Georgetown University,Loyola University of Chicago,University of Missouri-Columbia,University of North Carolina- Chapel Hill,University of Texas-Austin,Pennsylvania State University,Uni versity of Iowa,University of Wisconsin-Milwaukee,and Rutgers University provided a very helpful sounding board.Advice and assistance in data col- lection were provided by Greg Batey,Ivan Gruhl,Bill Mast,and Walter Rosenblatt at Lehman Brothers.Greg Batey and Emmanuel Roman provided many helpful comments at the early stages of this research.Arthur Warga wishes to thank Howard Clark,Jr.,for his grant supporting this and other research.Address correspondence to Arthur Warga,School of Business Administration,University of Wisconsin-Milwaukee,640 Bolton Hall,Mil- waukee,WI 53201. Tbe Review of Financial Studies Winter 1993 Vol.6,No.4,pp.959-982 1993 The Review of Financial Studies 0893-9454/93/$1.50