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

Authors

  • ULF AXELSON,

  • TIM JENKINSON,

  • PER STRÖMBERG,

  • MICHAEL S. WEISBACH

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    • Axelson is with the London School of Economics and SIFR; Jenkinson is with the Said Business School, Oxford University and CEPR; Strömberg is with SIFR, Stockholm School of Economics, CEPR, and NBER; and Weisbach is with Ohio State University, NBER, and SIFR. We are extremely grateful to Steve Kaplan for sharing his data on 1980s LBOs, and to Joakim Bång, Ji-Woong Chung, and Reimo Juks for excellent research assistance. We would also like to thank Viral Acharya, Malcolm Baker, Laura Bottazzi, Phil Canfield, Chris Collins, Marco DaRin, Francois Derrien, Chris James, Steve Kaplan, Steven Ongena, Morten Sorensen, David Sraer, Ayako Yasuda, as well as the Editor (Cam Harvey), the referees, and participants in numerous seminar presentations for valuable comments.


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, international sample of buyouts from 1980 to 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. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.

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