The structure of leveraged buyouts and the free-rider problem

Mike Burkart, Samuel Lee and Henrik Petri

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study the structure of public firm buyouts in a model that features the Berle-Means problem (lack of incentives) and the Grossman-Hart problem (holdout). We find that bootstrapping, debt in excess of funding needs, and upfront fees to bidders are socially optimal and increase buyout premiums. These elements make LBO financing tantamount to a “management contract” arranged by an outside manager to receive cash and incentives to manage a firm—except the cash is funded by excess debt imposed on the firm. Our model also rationalizes why PE firms collect fees from their equity partnerships and directly from target firms.

JEL-codes: G32 G34 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2026-01-29
New Economics Papers: this item is included in nep-bec and nep-cfn
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Published in Review of Financial Studies, 29, January, 2026. ISSN: 0893-9454

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:129543

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