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Financial Capital Structure in LBO Project Under Asymmetric Information

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  • Ouidad Yousfi

    () (MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier)

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.

Suggested Citation

  • Ouidad Yousfi, 2012. "Financial Capital Structure in LBO Project Under Asymmetric Information," Post-Print hal-00813878, HAL.
  • Handle: RePEc:hal:journl:hal-00813878
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00813878
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    References listed on IDEAS

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    8. Chan, Yuk-Shee & Siegel, Daniel R & Thakor, Anjan V, 1990. "Learning, Corporate Control and Performance Requirements in Venture Capital Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 365-381, May.
    9. Steven N. Kaplan & Jeremy C. Stein, 1993. "THE EVOLUTION OF BUYOUT PRICING AND FINANCIAL STRUCTURE (OR, WHAT WENT WRONG) IN THE 1980s," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(1), pages 72-88.
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    Cited by:

    1. Ouidad Yousfi & M. Kabir Hassan, 2014. "Moral hazard in Islamic profit–loss sharing contracts and private equity," Chapters,in: Handbook on Islam and Economic Life, chapter 18, pages iii-iii Edward Elgar Publishing.
    2. Ouidad Yousfi, 2013. "Does PLS financing solve asymmetric information problems?," Post-Print hal-00785325, HAL.

    More about this item

    Keywords

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

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