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

65 Pages Posted: 3 May 2010 Last revised: 2 Feb 2023

See all articles by Ulf Axelson

Ulf Axelson

London School of Economics; Swedish Institute for Financial Research (SIFR)

Tim Jenkinson

University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Per Strömberg

Swedish House of Finance; ECGI; CEPR

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2010

Abstract

This paper provides an empirical analysis of the financial structure of large buyouts. We collect detailed information on the financing of 1157 worldwide private equity deals from 1980 to 2008. Buyout leverage is cross-sectionally unrelated to the leverage of matched public firms, and is largely driven by factors other than what explains leverage in public firms. In particular, the economy-wide cost of borrowing is the main driver of both the quantity and the composition of debt in these buyouts. Credit conditions also have a strong effect on prices paid in buyouts, even after controlling for prices of equivalent public market companies. Finally, the use of high leverage in transactions negatively affects fund performance, controlling for fund vintage and other relevant characteristics. The results are consistent with the view that the availability of financing impacts booms and busts in the private equity market, and that agency problems between private equity funds and their investors can affect buyout capital structures.

Suggested Citation

Axelson, Ulf and Jenkinson, Tim and Stromberg, Per and Weisbach, Michael S., Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts (April 2010). NBER Working Paper No. w15952, Available at SSRN: https://ssrn.com/abstract=1598068

Ulf Axelson (Contact Author)

London School of Economics ( email )

United Kingdom

Swedish Institute for Financial Research (SIFR) ( email )

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Tim Jenkinson

University of Oxford - Said Business School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Per Stromberg

Swedish House of Finance ( email )

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ECGI ( email )

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Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI) ( email )

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