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Leverage and Pricing in Buyouts: An Empirical Analysis

  • Ulf Axelson
  • Tim Jenkinson

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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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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Web page: http://www.economics.ox.ac.uk/
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  1. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  2. Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers ysm181, Yale School of Management.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  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. 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.
  9. Steven N. Kaplan & Jeremy C. Stein, 1991. "The Evolution of Buyout Pricing and Financial Structure," NBER Working Papers 3695, National Bureau of Economic Research, Inc.
  10. Ulf Axelson, 2007. "Security Design with Investor Private Information," Journal of Finance, American Finance Association, vol. 62(6), pages 2587-2632, December.
  11. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
  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. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  14. 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.
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