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Buying to Sell: A Theory of Buyouts

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Private equity owned firms have more leverage, more intense compensation contracts, and higher productivity than comparable firms. We develop a theory of buyouts in oligopolistic markets that explains these facts. Private equity firms are more aggressive in inducing restructuring compared to incumbents since they maximize a trade sale price. The equilibrium trade sale price increases in restructuring not only by increasing the profit of the acquirer, but also by decreasing the profits of non-acquiring firms. Predictions on the exit mode and on when private equity firms can outbid incumbents in the market for corporate control are also derived.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 817.

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Length: 36 pages
Date of creation: 02 Jan 2010
Handle: RePEc:hhs:iuiwop:0817
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Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden

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