Measuring Idiosyncratic Risks in Leveraged Buyout Transactions

29 Pages Posted: 3 Mar 2008 Last revised: 30 Dec 2013

See all articles by Alexander Peter Groh

Alexander Peter Groh

EMLYON Research Centre for Entrepreneurial Finance; EMLYON Business School

Rainer Baule

University of Hagen

Oliver Gottschalg

HEC Paris - Strategy & Business Policy

Date Written: March 1, 2008

Abstract

We use a contingent claims analysis model to calculate the idiosyncratic risks in Leveraged Buyout transactions. A decisive feature of the model is the consideration of amortization. From the model, asset value volatility and equity value volatility can be derived via a numerical procedure. For a sample of 40 Leveraged Buyout transactions we determine the necessary model parameters and calculate the implied idiosyncratic risks. We verify the expected model sensitivities by varying the input parameters. For the first time, we are able to calculate Sharpe Ratios for individual Leveraged Buyouts, thereby fully incorporating the leverage risks.

Keywords: Idiosyncratic Risk, LBO, Private Equity, Benchmarking, CCA

JEL Classification: G13, G24, G32

Suggested Citation

Groh, Alexander Peter and Baule, Rainer and Gottschalg, Oliver, Measuring Idiosyncratic Risks in Leveraged Buyout Transactions (March 1, 2008). IESE Business School Working No. D682; EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=965684 or http://dx.doi.org/10.2139/ssrn.965684

Alexander Peter Groh (Contact Author)

EMLYON Research Centre for Entrepreneurial Finance ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Rainer Baule

University of Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

Oliver Gottschalg

HEC Paris - Strategy & Business Policy ( email )

Jouy-en-Josas Cedex, 78351
France

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