Measuring Idiosyncratic Risks in Leveraged Buyout Transactions

Oliver Gottschalg (), Alexander Peter Groh () and Rainer Baule
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Oliver Gottschalg: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique

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Abstract: We use a contingent claims analysis model to calculate the idiosyncratic risks in leveraged buyout transactions. A decisive feature of the model is the consideration of amortization. From the model, asset value volatility and equity value volatility can be derived via a numerical procedure. For a sample of 40 leveraged buyout transactions we determine the necessary model parameters and calculate the implied idiosyncratic risks. We verify the expected model sensitivities by varying the input parameters. For the first time, we are able to calculate Sharpe ratios for individual leveraged buyouts, thereby fully incorporating the leverage risks.

Keywords: RISK assessment; AMORTIZATION; EQUITY; LEVERAGED buyouts; ASSET acquisitions; CORPORATION reserves (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

Published in Quarterly Journal of Finance and Accounting, 2008, vol. 47, n° 4, pp. 5-24

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00758559

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