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Pre-LBO Credit Market Conditions and Post-LBO Target Behavior

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Abstract

In the context of leveraged buyouts (LBOs), this paper empirically studies the relation between pre-buyout credit market conditions and the post-buyout behavior of target companies, employing a supervisory dataset to overcome limited data availability for post-buyout target financial information. We propose an LBO-specific measure of (changes of) credit market conditions---the short-term (6-month) change of credit spreads leading up to buyout close. Using this proposed measure, we show that loosening pre-LBO credit market conditions, which are related to higher buyout leverage consistent with the literature, are associated with poor post-LBO (operating) performance of the target company. These results support the narrative of agency costs of debt such as risk shifting and debt overhang but are inconsistent with theories of disciplinary effects of debt. We provide further evidence supportive of the theories of agency costs of debt and some results favorable to the risk shifting story.

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  • Seung Kwak & Charles Press, 2023. "Pre-LBO Credit Market Conditions and Post-LBO Target Behavior," Finance and Economics Discussion Series 2023-077, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2023-77
    DOI: 10.17016/FEDS.2023.077
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    More about this item

    Keywords

    Private equity; Leveraged buyout; Credit market condition; Agency cost;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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