Monitoring, Implicit Contracting, and the Lack of Permanence of Leveraged Buyouts
Posted: 18 May 1998
Date Written: Undated
This paper presents a possible explanation for the lack of permanence of the very high level of concentration of ownership that accompanies leveraged buyouts. It argues that some diffusion of ownership can be beneficial to shareholders by encouraging employees to enter into implicit contracts with the firm. It then argues that investors in leveraged buyouts choose an initial level of concentration of ownership that is very high in order to breach existing implicit contracts. They then decrease the level of concentration of ownership in order to encourage employees to enter into new implicit contracts.
JEL Classification: G30
Suggested Citation: Suggested Citation