 The effect of leverage on the cost of capital of US buyoutsAlexander Groh () and
Oliver Gottschalg
Post-Print from HAL Abstract: This paper addresses the problem to assess the effect of leverage on the cost of capital for buyout performance analyses. It draws on a unique and proprietary set of data on 133 US buyouts between 1984 and 2004. For each of them, we determine a public market equivalent that matches it with respect to its timing and its systematic risk. We show that under realistic mimicking conditions, the average cost of capital is below the commonly used benchmark S&P 500. Thereby, we control for two important aspects: for the risks taken by lenders in the buyout transactions (which affects the sponsors' risks), and for the corresponding cost of debt (which lowers the return of the public market equivalent). Only with borrowing and lending at the risk-free rate is the average cost of capital close to the average index return. This finding is particularly important as existing literature on that topic tends to rely on benchmarks without a proper risk-adjustment. Keywords: Private equity; Cost of capital; Buyout; Benchmarking alternative assets (search for similar items in EconPapers) Published in Journal of Banking and Finance, 2011, 35 (8), pp.2099-2110. ⟨10.1016/j.jbankfin.2011.01.012⟩ There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02312605 DOI: 10.1016/j.jbankfin.2011.01.012 Access Statistics for this paper More papers in Post-Print from HAL |
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