IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/hal-04140881.html
   My bibliography  Save this paper

Leveraged Buy Out: Dynamic agency model with write-off option

Author

Listed:
  • Ouidad Yousfi

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

We present a dynamic agency model in which the LBO fund may write the entrepreneur's project off at the end of the starting stage to invest in a competitive project. The two partners provide unobservable efforts in both stages to enhance the productivity of the acquired company. We show that under restrictive conditions, the debt-equity contracts induce the entrepreneur and the LBO fund to provide the first best efforts under restrictive conditions in the two stages. Moreover, the write-off threat boosts the incentives of the entrepreneur and the LBO fund such that they provide high efforts. If the compensation cost is exogenous, the sharing rule of this cost depends on the quality of the competitive project. The entrepreneur and the bank share the amount of compensation if it is not very profitable. Otherwise, the whole amount of compensation is pledged to the entrepreneur. If the compensation's amount is endogenous, in order to induce the entrepreneur to provide high effort, the optimal financial contracts must give her the entire compensation's revenue.

Suggested Citation

  • Ouidad Yousfi, 2009. "Leveraged Buy Out: Dynamic agency model with write-off option," Working Papers hal-04140881, HAL.
    • Handle: RePEc:hal:wpaper:hal-04140881
    Note: View the original document on HAL open archive server: https://hal.science/hal-04140881
    as

    Download full text from publisher

    File URL: https://hal.science/hal-04140881/document
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael C. Jensen, 2010. "Active Investors, LBOs, and the Privatization of Bankruptcy," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 77-85, January.
    2. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, June.
    3. Giacinta Cestone & Lucy White, 2003. "Anticompetitive Financial Contracting: The Design of Financial Claims," Journal of Finance, American Finance Association, vol. 58(5), pages 2109-2141, October.
    4. Chan, Yuk-Shee & Siegel, Daniel R & Thakor, Anjan V, 1990. "Learning, Corporate Control and Performance Requirements in Venture Capital Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 365-381, May.
    5. Steven N. Kaplan & Jeremy C. Stein, 1993. "THE EVOLUTION OF BUYOUT PRICING AND FINANCIAL STRUCTURE (OR, WHAT WENT WRONG) IN THE 1980s," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(1), pages 72-88, March.
    6. repec:bla:jfinan:v:58:y:2003:i:5:p:2059-2086 is not listed on IDEAS
    7. Bengt Holmstrom & Steven N. Kaplan, 2001. "Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 121-144, Spring.
    8. Michael C. Jensen, 1991. "Corporate Control And The Politics Of Finance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(2), pages 13-34, June.
    9. Chang, Chun, 1993. "Payout Policy, Capital Structure, and Compensation Contracts When Managers Value Control," The Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 911-933.
    10. Giacinta CESTONE, 2001. "Venture Capital Meets Contract Theory: Risky Claims or Formal Control?," UFAE and IAE Working Papers 480.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    11. Catherine Casamatta, 2003. "Financing and Advising: Optimal Financial Contracts with Venture Capitalists," Journal of Finance, American Finance Association, vol. 58(5), pages 2059-2085, October.
    12. Ippolito, Richard A & James, William H, 1992. "LBOs, Reversions and Implicit Contracts," Journal of Finance, American Finance Association, vol. 47(1), pages 139-167, March.
    13. Giot, Pierre & Schwienbacher, Armin, 2007. "IPOs, trade sales and liquidations: Modelling venture capital exits using survival analysis," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 679-702, March.
    14. Armin Schwienbacher, 2008. "Innovation and Venture Capital Exits," Economic Journal, Royal Economic Society, vol. 118(533), pages 1888-1916, November.
    15. Rafael Repullo & Javier Suarez, 2004. "Venture Capital Finance: A Security Design Approach," Review of Finance, European Finance Association, vol. 8(1), pages 75-108.
    16. Admati, Anat R & Pfleiderer, Paul, 1994. "Robust Financial Contracting and the Role of Venture Capitalists," Journal of Finance, American Finance Association, vol. 49(2), pages 371-402, June.
    17. Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, August.
    18. Servaes, Henri, 1994. "Do Takeover Targets Overinvest?," The Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 253-277.
    19. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    20. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
    21. repec:bla:jfinan:v:58:y:2003:i:5:p:2109-2142 is not listed on IDEAS
    22. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    23. Phillippe Desbrières & Alain Schatt, 2002. "The Impacts of LBOs on the Performance of Acquired Firms: The French Case," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(5‐6), pages 695-729.
    24. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    25. Hirao, Yukiko, 1993. "Learning and Incentive Problems in Repeated Partnerships," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 101-119, February.
    26. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    27. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(1), pages 1-32.
    28. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ouidad Yousfi, 2010. "Exit routes in LBO projects," Working Papers hal-04140925, HAL.
    2. Ouidad Yousfi, 2009. "Leveraged Buy Out: Dynamic agency model with write-off option," EconomiX Working Papers 2009-13, University of Paris Nanterre, EconomiX.
    3. Ouidad Yousfi, 2012. "Financial Capital Structure in LBO Project Under Asymmetric Information," Post-Print hal-00813878, HAL.
    4. Ouidad Yousfi, 2008. "Leveraged Buy Out and Tax saving advantage: a double-sided moral hazard model," Working Papers hal-04140742, HAL.
    5. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 573-648, Elsevier.
    6. Andrew Metrick & Ayako Yasuda, 2011. "Venture Capital and Other Private Equity: a Survey," European Financial Management, European Financial Management Association, vol. 17(4), pages 619-654, September.
    7. Douglas Cumming & Sofia Johan, 2007. "Advice and monitoring in venture finance," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(1), pages 3-43, March.
    8. Casamatta, Catherine & Haritchabalet, Carole, 2007. "Experience, screening and syndication in venture capital investments," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 368-398, July.
    9. Ouidad Yousfi & M. Kabir Hassan, 2014. "Moral hazard in Islamic profit–loss sharing contracts and private equity," Chapters, in: M. Kabir Hassan & Mervyn K. Lewis (ed.), Handbook on Islam and Economic Life, chapter 18, pages iii-iii, Edward Elgar Publishing.
    10. Cumming, Douglas J., 2005. "Capital structure in venture finance," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 550-585, June.
    11. Jens Burchardt & Ulrich Hommel & Dzidziso Samuel Kamuriwo & Carolina Billitteri, 2016. "Venture Capital Contracting in Theory and Practice: Implications for Entrepreneurship Research," Entrepreneurship Theory and Practice, , vol. 40(1), pages 25-48, January.
    12. Kanniainen, Vesa & Keuschnigg, Christian, 2004. "Start-up investment with scarce venture capital support," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1935-1959, August.
    13. Maria do Rosario Correia & Raquel F. Ch. Meneses, 2019. "Venture Capital and the Use of Convertible Securities and Control Rights Covenants: A Fuzzy Set Approach," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 5(1), pages 5-20.
    14. Tereza Tykvová, 2007. "What Do Economists Tell Us About Venture Capital Contracts?," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 65-89, February.
    15. Ouidad Yousfi, 2013. "Does PLS financing solve asymmetric information problems?," Post-Print hal-00785325, HAL.
    16. Suting Hong & Konstantinos Serfes & Veikko Thiele, 2020. "Competition in the venture capital market and the success of startup companies: Theory and evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 741-791, October.
    17. Jochen Bigus, 2006. "Staging of Venture Financing, Investor Opportunism and Patent Law," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7‐8), pages 939-960, September.
    18. Tennert, Julius & Lambert, Marie & Burghof, Hans-Peter, 2017. "Moral hazard in VC finance: More expensive than you thought," Hohenheim Discussion Papers in Business, Economics and Social Sciences 02-2017, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    19. Patrícia Becsky-Nagy, 2016. "The Special Aspects of Venture Capital’s Value Creating Mechanisms in Hungary," Journal of Entrepreneurship, Management and Innovation, Fundacja Upowszechniająca Wiedzę i Naukę "Cognitione", vol. 12(3), pages 31-55.
    20. Cumming, Douglas & Schmidt, Daniel & Walz, Uwe, 2004. "Legality and venture governance around the world," CFS Working Paper Series 2004/17, Center for Financial Studies (CFS).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-04140881. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.