Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts
London School of Economics; Swedish Institute for Financial Research (SIFR)
University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Oxford - Said Business School
Swedish House of Finance
Michael S. Weisbach
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. DP8914
Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories. Using a large, detailed, international sample of buyouts from 1980-2008, we find that buyout leverage is unrelated to the cross-sectional factors -- suggested by traditional capital structure theories -- that drive public firm leverage. Instead, variation in economy-wide credit conditions is the main determinant of leverage in buyouts, while having little impact on public firms. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.
Number of Pages in PDF File: 53
Keywords: capital structure, credit cycles, leveraged buyouts, Private equity
JEL Classification: G24, G32
Date posted: April 4, 2012
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