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Exit routes in LBO projects

Ouidad Yousfi ()

No 2010-6, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: The current paper studies the financial structure in buyout firms under moral hazard due to unobservable efforts and an excessive risk-taking. The choice of the exit route may lead to agency conflicts between the entrepreneur and the LBO firm: the former may take very risky decisions to increase the probability of IPO exit. If the target is taking public, he gets a non transferable and private benefit. The opportunistic behavior of the entrepreneur decreases the probability of sale exit; the preferred exit route of the LBO firm. Without moral hazard, there are many ways to finance the project and the two agents exert strictly positive efforts. With moral hazard, the entrepreneur, the LBO firm and the bank must finance jointly the buyout. Financing the project through standard debt-equity contracts does not implement the first-best solution. Only a set of projects can be financed through both the LBO fund and the bank at the macroeconomic level. If the entrepreneur is not wealthy enough, her project is not undertaken

Keywords: LBO; moral hazard; excessive taking risk; financial structure; Exits (search for similar items in EconPapers)
JEL-codes: G15 G23 G32 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010
New Economics Papers: this item is included in nep-cta and nep-ppm
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2010-6

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