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Leverage and Pricing in Buyouts: An Empirical Analysis

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  • Ulf Axelson
  • Tim Jenkinson

Abstract

This paper provides an empirical analysis of the financial structure of large recent buyouts.� We collect detailed information of the financings of 153 large buyouts (averaging over $1 billion in enterprise value).� We document the manner in which these important transactions are financed.� Buyout leverage is cross-sectionally unrelated to the leverage of matched public firms, and is largely driven by other factors than what explains leverage in public firms.� In particular, the economy-wide cost of borrowing seems to drive leverage.� Prices paid in buyouts are related to the prices observed for matched firms in the public market, but are also strongly affected by the economy-wide cost of borrowing.� These results are consistent with a view in which the availability of financing impacts booms and busts in the private equity market.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2008fe20.

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Date of creation: 01 Feb 2008
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Handle: RePEc:oxf:wpaper:2008fe20

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Keywords: Private Equity; Capital Structure; Buyouts;

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References

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  1. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
  2. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
  3. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers.
  4. Robert Gertner & David Scharfstein, 1991. "A Theory of Workouts and the Effects of Reorganization Law," NBER Technical Working Papers 0103, National Bureau of Economic Research, Inc.
  5. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  6. Lucas, Deborah J & McDonald, Robert L, 1990. " Equity Issues and Stock Price Dynamics," Journal of Finance, American Finance Association, vol. 45(4), pages 1019-43, September.
  7. Kaplan, Steven N & Stein, Jeremy C, 1993. "The Evolution of Buyout Pricing and Financial Structure in the 1980s," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 313-57, May.
  8. Steven N. Kaplan & Jeremy C. Stein, 1993. "The Evolution of Buyout Pricing and Financial Structure," NBER Working Papers 3695, National Bureau of Economic Research, Inc.
  9. Ulf Axelson, 2007. "Security Design with Investor Private Information," Journal of Finance, American Finance Association, vol. 62(6), pages 2587-2632, December.
  10. Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers ysm181, Yale School of Management.
  11. 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.
  12. Gompers, Paul & Lerner, Josh, 2000. "Money chasing deals? The impact of fund inflows on private equity valuation," Journal of Financial Economics, Elsevier, vol. 55(2), pages 281-325, February.
  13. Axelson, Ulf & Strömberg, Per Johan & Weisbach, Michael, 2007. "Why are Buyouts Leveraged? The Financial Structure of Private Equity Firms," CEPR Discussion Papers 6133, C.E.P.R. Discussion Papers.
  14. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
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Citations

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Cited by:
  1. Robin Greenwood & Samuel G. Hanson, 2010. "Issuer Quality and Corporate Bond Returns," Harvard Business School Working Papers 11-065, Harvard Business School.
  2. Robin Greenwood & Samuel G. Hanson, 2011. "Issuer Quality and the Credit Cycle," NBER Working Papers 17197, National Bureau of Economic Research, Inc.
  3. Shai Bernstein & Josh Lerner & Morten Sørensen & Per Strömberg, 2010. "Private Equity and Industry Performance," Harvard Business School Working Papers 10-045, Harvard Business School.
  4. Steven N. Kaplan & Per Strömberg, 2008. "Leveraged Buyouts and Private Equity," NBER Working Papers 14207, National Bureau of Economic Research, Inc.
  5. Rosemary Batt & Eileen Appelbaum, 2013. "The Impact of Financialization on Management and Employment Outcomes," Upjohn Working Papers and Journal Articles 13-191, W.E. Upjohn Institute for Employment Research.
  6. Eileen Appelbaum & Rosemary Batt, 2012. "A Primer on Private Equity at Work: Management, Employment, and Sustainability," CEPR Reports and Issue Briefs 2012-05, Center for Economic and Policy Research (CEPR).
  7. Gabriel Jiménez & Steven Ongena & José Luis Peydró & Jesús Saurina, 2009. "Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking?," Banco de Espa�a Working Papers 0833, Banco de Espa�a.
  8. Axelson, Ulf & Stromberg, Per & Weisbach, Michael S., 2008. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Working Paper Series 2008-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  9. Sjögren, Anna, 2010. "Graded Children – Evidence of Longrun Consequences of School Grades from a Nationwide Reform," Working Paper Series 839, Research Institute of Industrial Economics.
  10. Norbäck, Pehr-Johan & Persson, Lars & Tåg, Joacim, 2010. "Ownership Efficiency and Tax Advantages: The Case of Private Equity Buyouts," Working Paper Series 841, Research Institute of Industrial Economics.
  11. Alexander Peter Groh & Oliver Gottschalg, 2008. "The Opportunity Cost of Capital of US Buyouts," NBER Working Papers 14148, National Bureau of Economic Research, Inc.
  12. Ioannidou, V. & Ongena, S. & Peydro, J.L., 2009. "Monetary Policy, Risk-Taking, and Pricing: Evidence from a Quasi-Natural Experiment," Discussion Paper 2009-31 S, Tilburg University, Center for Economic Research.
  13. Phillip Leslie & Paul Oyer, 2008. "Managerial Incentives and Value Creation: Evidence from Private Equity," NBER Working Papers 14331, National Bureau of Economic Research, Inc.

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