A theory of LBO activity based on repeated debt-equity conflicts
Name
Malenko_A theory.pdf
Description
Accepted version
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345.86 KB
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Author(s)
Malenko, Andrey
Malenko, Nadya
Date Issued
September 2015
Journal
Journal of Financial Economics
Publisher
Elsevier BV
Citation
Malenko, Andrey and Nadya Malenko. "A theory of LBO activity based on repeated debt-equity conflicts." Journal of Financial Economics 117, 3 (September 2015): 607-627 © 2015 Elsevier B.V.
Version
Author's final manuscript
Abstract
We develop a theory of leveraged buyout (LBO) activity based on two elements: the ability of private equity-owned firms to borrow against their sponsors' reputation with creditors and externalities in sponsors' reputations due to competition and club formation. In equilibrium, the two sources of value creation in LBOs, operational improvements and financing, are complements. Moreover, sponsors that never add operational value cannot add value through financing either. Club deals are beneficial ex post by allowing low-reputation bidders with high valuations to borrow reputation from high-reputation bidders with low valuations, but they can destroy value by reducing bidders' investment in reputation. Unlike leverage of independent firms, driven only by firm-specific factors, buyout leverage is driven by economy-wide and sponsor-specific factors.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Sloan School of Management
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Creative Commons Attribution-NonCommercial-NoDerivs License
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DOI of Published Version
https://doi.org/10.1016/j.jfineco.2015.06.007
