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
Alexander Peter Groh: GSCM Montpellier Business School - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School
Rainer Baule: Institute of Banking and Finance - Georg-August-University of Göttingen = Georg-August-Universität Göttingen

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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: Idiosyncratic Risk; LBO; Private Equity; Benchmarking; CCA (search for similar items in EconPapers)
Date: 2011-03-25
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Published in 2011

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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-00580052

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