Exit routes in LBO projects
AbstractThe current paper studies the financial structure in buyout firms under moral hazard due to unobservable efforts and an excessive risk-taking. The choice of the exit route may lead to agency conflicts between the entrepreneur and the LBO firm: the former may take very risky decisions to increase the probability of IPO exit. If the target is taking public, he gets a non transferable and private benefit. The opportunistic behavior of the entrepreneur decreases the probability of sale exit; the preferred exit route of the LBO firm. Without moral hazard, there are many ways to finance the project and the two agents exert strictly positive efforts. With moral hazard, the entrepreneur, the LBO firm and the bank must finance jointly the buyout. Financing the project through standard debt-equity contracts does not implement the first-best solution. Only a set of projects can be financed through both the LBO fund and the bank at the macroeconomic level. If the entrepreneur is not wealthy enough, her project is not undertaken
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Bibliographic InfoPaper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2010-6.
Length: 22 pages
Date of creation: 2010
Date of revision:
LBO; moral hazard; excessive taking risk; financial structure; Exits;
Find related papers by JEL classification:
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-04 (All new papers)
- NEP-CTA-2010-04-04 (Contract Theory & Applications)
- NEP-PPM-2010-04-04 (Project, Program & Portfolio Management)
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