The Structure of Debt and Equity Financing and the Likelihood of Subsequent Default in Leveraged Buyouts
Posted: 18 May 1998
Date Written: September 1995
Abstract
This study investigates the structure of the debt and equity financing for a sample of leveraged buyouts for the period 1984 to 1989. We find that as the average maturity of the debt increases, the likelihood of a subsequent default decreases. This suggests that choosing debt with longer maturities reduces the probability of loss of control. We also find that firms in which buyout specialists have majority control have a significantly lower likelihood of subsequent default and debt with a significantly higher average maturity. In addition, these firms have more buyout specialists on the board of directors. These findings suggest that buyout specialists provide valuable monitoring benefits which substitute for the disciplining power of shorter debt maturity.
JEL Classification: G32
Suggested Citation: Suggested Citation