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

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Author Info

  • Axelson, Ulf

    (London School of Economics and SIFR)

  • Jenkinson, Tim

    (University of Oxford and CEPR)

  • Stromberg, Per

    (SIFT and Stockholm School of Economics)

  • Weisbach, Michael S.

    (Ohio State University)

Abstract

This paper provides an empirical analysis of the financial structure of large buyouts. We collect detailed information on the financing of 1157 worldwide private equity deals from 1980 to 2008. Buyout leverage is cross-sectionally unrelated to the leverage of matched public firms, and is largely driven by factors other than what explains leverage in public firms. In particular, the economy-wide cost of borrowing is the main driver of both the quantity and the composition of debt in these buyouts. Credit conditions also have a strong effect on prices paid in buyouts, even after controlling for prices of equivalent public market companies. Finally, the use of high leverage in transactions negatively affects fund performance, controlling for fund vintage and other relevant characteristics. The results are consistent with the view that the availability of financing impacts booms and busts in the private equity market, and that agency problems between private equity funds and their investors can affect buyout capital structures.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2010/2010-9.pdf
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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2010-9.

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Date of creation: Apr 2010
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Handle: RePEc:ecl:ohidic:2010-9

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  1. Boucly, Quentin & Sraer, David & Thesmar, David, 2011. "Growth LBOs," Journal of Financial Economics, Elsevier, vol. 102(2), pages 432-453.
  2. Victoria Ivashina & Anna Kovner, 2011. "The Private Equity Advantage: Leveraged Buyout Firms and Relationship Banking," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2462-2498.
  3. Campbell, Rachel A.J., 2008. "Art finance," Open Access publications from Maastricht University urn:nbn:nl:ui:27-19578, Maastricht University.
  4. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, 02.
  5. Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
  6. Cara S. Lown & Donald P. Morgan & Sonali Rohatgi, 2000. "Listening to loan officers: the impact of commercial credit standards on lending and output," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-16.
  7. Baker, Malcolm & Greenwood, Robin & Wurgler, Jeffrey, 2003. "The maturity of debt issues and predictable variation in bond returns," Journal of Financial Economics, Elsevier, vol. 70(2), pages 261-291, November.
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Cited by:
  1. 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.
  2. 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.
  3. Lopez-de-Silanes, Florencio & Phalippou, Ludovic & Gottschalg, Olivier, 2010. "Giants at the Gate: On the Cross-section of Private Equity Investment Returns," MPRA Paper 28487, University Library of Munich, Germany.
  4. 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.
  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 20000, Tinbergen Institute.
  6. 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.
  7. Nadauld, Taylor D. & Weisbach, Michael S., 2010. "Did Securitization Affect the Cost of Corporate Debt?," Working Paper Series 2010-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  8. 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.
  9. Gregory, David, 2013. "Private equity and financial stability," Bank of England Quarterly Bulletin, Bank of England, vol. 53(1), pages 38-47.

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