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Financial Capital Structure in LBO Project Under Asymmetric Information

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  • Ouidad Yousfi

    ()
    (MRM - Montpellier Recherche en Management - Université Montpellier II - Sciences et techniques : EA4557 - Université Montpellier I - Université Paul Valéry - Montpellier III - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School)

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    Abstract

    This paper analyzes the link between the financial capital structure in LBO (Leveraged Buyout) acquisitions and the agents' incentives under asymmetric information. We present a static model with three agents: the entrepreneur, the LBO fund and the bank. The first two agents provide complementary and non-observable efforts to enhance the distribution of the project's revenues. Our results provide evidence that there are no debt-equity contracts that solve the double-sided moral hazard problem; however, the project must be financed jointly by the three partners. Moreover, financing the project through a mixture of debt and equity or solely through equity does not improve the incentive to provide efforts. Under taxation, agents provide low levels of efforts, but the entrepreneur is better off if the level of leverage is the highest to take advantage of the tax deductibility of interests.

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    File URL: http://hal.archives-ouvertes.fr/docs/00/81/38/78/PDF/Financial_Capital_structure_LBO.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number hal-00813878.

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    Date of creation: 2012
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    Publication status: Published, The IUP Journal of Corporate Governance, 2012, 6, 3, pp.7-35
    Handle: RePEc:hal:journl:hal-00813878

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00813878
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    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: Corporate Governance Journal; Financial Capital Structure; LBO Projects; Under Asymmetric Information; Leveraged Buyout; Leveraged Management Buyout.;

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    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. Phillippe Desbrières & Alain Schatt, 2002. "The Impacts of LBOs on the Performance of Acquired Firms: The French Case," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(5&6), pages 695-729.
    14. Bengt Holmstrom & Steven N. Kaplan, 2001. "Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 121-144, Spring.
    15. Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, 08.
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