Financial Capital Structure in LBO Project Under Asymmetric Information

Ouidad Yousfi ()

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Abstract: This paper analyzes the link between the financial capital structure in LBO (Leveraged Buyout) acquisitions and the agents' incentives under asymmetric information. We present a static model with three agents: the entrepreneur, the LBO fund and the bank. The first two agents provide complementary and non-observable efforts to enhance the distribution of the project's revenues. Our results provide evidence that there are no debt-equity contracts that solve the double-sided moral hazard problem; however, the project must be financed jointly by the three partners. Moreover, financing the project through a mixture of debt and equity or solely through equity does not improve the incentive to provide efforts. Under taxation, agents provide low levels of efforts, but the entrepreneur is better off if the level of leverage is the highest to take advantage of the tax deductibility of interests.

Keywords: Corporate Governance Journal; Financial Capital Structure; LBO Projects; Under Asymmetric Information; Leveraged Buyout; Leveraged Management Buyout.; Leveraged Management Buyout (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cfn, nep-cta and nep-ppm
Note: View the original document on HAL open archive server: https://hal.science/hal-00813878v1
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Citations: View citations in EconPapers (2)

Published in The IUP Journal of Corporate Governance, 2012, 6 (3), pp.7-35

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00813878

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