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Borrow cheap, buy high? The determinants of leverage and pricing in buyouts

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  • Axelson, Ulf
  • Jenkinson, Tim
  • Strömberg, Per
  • Weisbach, Michael

Abstract

Private equity sponsors pay special attention to designing capital structure, making buyouts an interesting setting for examining capital structure theories. In a detailed international sample of buyouts, we find that buyout leverage is unrelated to factors that drive public firm leverage, such as industry factors and other cross-sectional characteristics, contrary to what standard capital structure theories suggest. Instead, variation in economy-wide credit conditions is the main driver of leverage and pricing in buyouts, while having little impact on public firms. Higher deal leverage is associated with lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.

Suggested Citation

  • Axelson, Ulf & Jenkinson, Tim & Strömberg, Per & Weisbach, Michael, 2012. "Borrow cheap, buy high? The determinants of leverage and pricing in buyouts," LSE Research Online Documents on Economics 119054, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119054
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    More about this item

    Keywords

    private equity; capital structure; buyouts; credit cycles;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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