Leverage and the performance of buyouts |
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Authors: | Nico Engel Reiner Braun Ann-Kristin Achleitner |
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Institution: | 1.TUM School of Management, Center for Entrepreneurial and Financial Studies (CEFS),TU München,Munich,Germany |
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Abstract: | In this paper we investigate the effects of debt usage on (risk-adjusted) equity returns in private equity-backed buyout transactions.
We use a proprietary data set of more than 700 realized European and North American buyouts acquired between 1990 and 2006
to empirically assess theoretical predictions. Our results show a positive relationship between debt levels and equity returns
indicating the return-enhancing effects related to leverage. However, our results also provide evidence that it is possible
to ‘over-leverage’ a company, i.e. at very high levels of leverage (debt to total capital of approximately 90%) the increased
company default risk outweighs the positive effects related to leverage resulting in decreasing equity returns. On the other
side, we find no significant relationship between leverage and risk-adjusted equity returns which implies that the return
increase through higher debt ratios comes along with increasing risk. In addition, we show that private equity sponsors successfully
conduct debt-equity-arbitrage in times of favorable debt market conditions. This implies that these investors successfully
time debt markets. |
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