Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts
53 Pages Posted: 4 Apr 2012
Date Written: March 2012
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: capital structure, credit cycles, leveraged buyouts, Private equity
JEL Classification: G24, G32
Suggested Citation: Suggested Citation