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Measuring Idiosyncratic Risks in Leveraged Buyout Transactions

Author

Listed:
  • Oliver Gottschalg

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Alexander Peter Groh
  • Rainer Baule

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.

Suggested Citation

  • Oliver Gottschalg & Alexander Peter Groh & Rainer Baule, 2008. "Measuring Idiosyncratic Risks in Leveraged Buyout Transactions," Post-Print hal-00758559, HAL.
    • Handle: RePEc:hal:journl:hal-00758559
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    Cited by:

    1. Groh, Alexander Peter & Gottschalg, Oliver, 2011. "The effect of leverage on the cost of capital of US buyouts," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2099-2110, August.
    2. Braun, Reiner & Engel, Nico & Hieber, Peter & Zagst, Rudi, 2011. "The risk appetite of private equity sponsors," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 815-832.

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