LBO Financing
Swedish House of Finance Research Paper No. 20-9
European Corporate Governance Institute – Finance Working Paper 698/2020
48 Pages Posted: 26 Mar 2020 Last revised: 4 Nov 2021
There are 2 versions of this paper
LBO Financing
The Social Value of Debt in the Market for Corporate Control
Date Written: May 7, 2021
Abstract
We analyze takeover financing in a model where bidders must overcome the free-rider problem to restore ownership incentives. Bootstrapping, "excessive" debt levels, and negative financing contributions by bidders – the controversial traits of leveraged buyouts – emerge as the Pareto efficient takeover bid design. Takeover debt is crucial to equity consolidation, Pareto sharing of the incentive gains, and efficient takeover competition, all while wealth constraints are slack. These benefits are unique to the market for corporate control, that is, absent outside of takeovers.
Keywords: Leveraged buyouts, bootstrap acquisitions, tender offers, free-rider problem, debt overhang, private equity
JEL Classification: G34, G32
Suggested Citation: Suggested Citation