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Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts

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  • Axelson, Ulf
  • Jenkinson, Tim
  • Strömberg, Per Johan
  • Weisbach, Michael

Abstract

Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories. Using a large, detailed, international sample of buyouts from 1980-2008, we find that buyout leverage is unrelated to the cross-sectional factors -- suggested by traditional capital structure theories -- that drive public firm leverage. Instead, variation in economy-wide credit conditions is the main determinant of leverage in buyouts, while having little impact on public firms. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8914.

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Date of creation: Mar 2012
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Handle: RePEc:cpr:ceprdp:8914

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Keywords: capital structure; credit cycles; leveraged buyouts; Private equity;

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Citations

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Cited by:
  1. Taylor D. Nadauld & Michael S. Weisbach, 2011. "Did Securitization Affect the Cost of Corporate Debt?," NBER Working Papers 16849, National Bureau of Economic Research, Inc.
  2. Colla, Paolo & Ippolito, Filippo & Wagner, Hannes F., 2012. "Leverage and pricing of debt in LBOs," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 124-137.
  3. Thorsten Knauer & Friedrich Sommer, 2012. "Interest barrier rules as a response to highly leveraged transactions: Evidence from the 2008 German business tax reform," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(2), pages 206-232, May.
  4. Achleitner, Ann-Kristin & Braun, Reiner & Engel, Nico, 2011. "Value creation and pricing in buyouts: Empirical evidence from Europe and North America," Review of Financial Economics, Elsevier, vol. 20(4), pages 146-161.
  5. Florencio Lopez-de-Silanes & Ludovic Phalippou & Oliver Gottschalg, 2011. "Giants at the Gate: On the Cross-Section of Private Equity Investment Returns," Tinbergen Institute Discussion Papers 11-035/2/DSF12, Tinbergen Institute.
  6. Lily Fang & Victoria Ivashina & Josh Lerner, 2013. "Combining Banking with Private Equity Investing," NBER Working Papers 19300, National Bureau of Economic Research, Inc.
  7. Tykvová, Tereza & Borell, Mariela, 2012. "Do private equity owners increase risk of financial distress and bankruptcy?," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 138-150.
  8. Cohn, Jonathan B. & Mills, Lillian F. & Towery, Erin M., 2014. "The evolution of capital structure and operating performance after leveraged buyouts: Evidence from U.S. corporate tax returns," Journal of Financial Economics, Elsevier, vol. 111(2), pages 469-494.
  9. David T. Robinson & Berk A. Sensoy, 2011. "Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity," NBER Working Papers 17428, National Bureau of Economic Research, Inc.
  10. Gregory, David, 2013. "Private equity and financial stability," Bank of England Quarterly Bulletin, Bank of England, vol. 53(1), pages 38-47.
  11. Lily Fang & Victoria Ivashina & Josh Lerner, 2013. "The Disintermediation of Financial Markets: Direct Investing in Private Equity," NBER Working Papers 19299, National Bureau of Economic Research, Inc.
  12. Achleitner, Ann-Kristin & Braun, Reiner & Tappeiner, Florian, 2009. "Structure and determinants of financial covenants in leveraged buyouts - evidence from an economy with strong creditor rights," CEFS Working Paper Series 2009-15, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.

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