Working Paper: CEPR ID: DP8914
Authors: Ulf Axelson; Tim Jenkinson; Per Johan Stömberg; Michael Weisbach
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, 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 Codes: G24; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economy-wide credit conditions (E66) | buyout leverage (G32) |
| high-yield spread (G12) | buyout leverage (G32) |
| buyout leverage (G32) | transaction prices (P22) |
| buyout leverage (G32) | buyout fund returns (G34) |
| credit conditions (F34) | overpayment tendency (J33) |
| agency problems (G34) | overinvestment (G31) |
| overinvestment (G31) | fund returns (G12) |