Tbe Review of Financial Studies/v 6 n 4 1993 The consensus of past work has been that equity holders receive substantial gains.There is considerably less agreement of the effect of LBOs on the wealth of target bondholders due to the lack of high- quality corporate bond data.By focusing on the issue of bond data sources,we demonstrate that studies that measure the timing and magnitude of security price reaction to recent information (e.g.,LBO announcements)can be sensitive to the type of data that is used.We find that LBOs cause real bondholder losses and that the main effect is concentrated at the time of the LBO announcement. Unfortunately,high-quality bond data are not always available.Most bond trading is carried out in the dealer market where prices are proprietary.Publicly available data,such as that produced by bond trades on the New York Stock Exchange,can be inadequate because these markets are extremely thin.Bond prices from commercial ser. vices that purport to be based on the dealer market are usually tied to an algorithm that does not always incorporate recent information. Although Warga (1991)finds that dealer and exchange-based data sources provide similar prices for large portfolios under normal cir- cumstances,this article shows that high-volume dealer market prices can show important differences in event studies.We find that our dealer market yields react not only sooner than exchange-based yields, but they also show statistically and economically more significant effects.For example,in a current study on LBOs that relies on the s&P bond data,Asquith and Wizman (1990)find an average four- month LBO risk-adjusted announcement bondholder return of-3.2 percent.In contrast,we document equivalent returns of-6.5 to -7.3 percent in the set of overlapping bonds for which the Asquith and Wizman data suggests a-3.8 percent return.Moreover,if we either properly aggregate returns among correlated bonds or if we exclude R.J.R.Nabisco,the S&P data (unlike the trader-quoted data used in this paper)no longer suggest a significant loss of bondholder wealth. Of course,the effect of LBOs on the wealth of bondholders is an interesting issue in its own right and must be addressed to determine the effect of LBOs on total firm value.It has been suggested in aca- demic studies [e.g.,Shleifer and Summers (1988)],as well as in the popular press,that the gains obtained by stockholders may be largely at the expense of bondholders;that is,net firm value may not change significantly.Counter to this argument are claims that improvements in operating efficiency or tax advantages [e.g.,Jensen (1986)]may increase the firm's total value and thus leave bondholders without any losses or,possibly,even with gains. Using exchange data collected from the Wall Street fournal,Lehn and Poulsen (1988)and Marais,Schipper,and Smith (1989)first examined the effect of LBOs on the price performance of outstanding 960