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

66 Pages Posted: 27 Apr 2010 Last revised: 6 Dec 2018

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

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: October 10, 2012

Abstract

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.

Keywords: Private Equity, Capital Structure, Buyouts, Credit Cycles

JEL Classification: G32, G34

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 (October 10, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1596019 or http://dx.doi.org/10.2139/ssrn.1596019

Ulf Axelson (Contact Author)

London School of Economics ( email )

United Kingdom

Swedish Institute for Financial Research (SIFR) ( email )

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

Tim Jenkinson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288916 (Phone)
+44 1865 288831 (Fax)

HOME PAGE: http://www.sbs.oxford.edu/timjenkinson

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Per Stromberg

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Michael S. Weisbach

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

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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