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Ouidad yousfi (2009)

Is the bank's involvement in LBO acquisitions a mean to encourage efforts or to save taxes?

Unpublished.

Abstract: This paper studies the relationship between the financial capital structure in LBO (Leveraged Buy Out) acquisitions and the agents' incentives when there is a double sided moral hazard problem. The entrepreneur and the LBO fund provide complementary efforts that influence the distribution of the project's returns which may take either a high or a low value. The former agent needs to raise capital to take a company private. Both an LBO fund and a bank have sufficient funds to finance the investment. Hence, the involvement of the bank is not needed to get the project going. We show that there is no debt-equity contract that implements the first best efforts. Despite the fact that financing the project through a mixture of debt and equity or solely through equity lead the partners to provide the same level of efforts, the entrepreneur relies on both the LBO fund and the bank. To explain the high level of debt in LBO projects, the tax deductibility of the debt's interests seems to be a convincing theoretical rationale for the involvement of banks in buyout acquisitions. Key words: double moral hazard, debt, capital structure, LBO, tax advantage. JEL classification: G24, G32, G34.
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