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

  • ULF AXELSON
  • TIM JENKINSON
  • PER STRÖMBERG
  • MICHAEL S. WEISBACH

Private equity sponsors pay special attention to designing capital structure, making buyouts an interesting setting for examining capital structure theories. In a detailed international sample of buyouts, we find that buyout leverage is unrelated to factors that drive public firm leverage, such as industry factors and other cross-sectional characteristics, contrary to what standard capital structure theories suggest. Instead, variation in economy-wide credit conditions is the main driver of leverage and pricing in buyouts, while having little impact on public firms. Higher deal leverage is associated with lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.

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File URL: http://hdl.handle.net/10.1111/jofi.2013.68.issue-6
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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 68 (2013)
Issue (Month): 6 (December)
Pages: 2223-2267

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Handle: RePEc:bla:jfinan:v:68:y:2013:i:6:p:2223-2267
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