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Ouidad YOUSFI (2009)

Leveraged Buy Out: Does the Write-off threat increase the agents' incentives?

Unpublished.

Abstract: This paper studies the financial capital structure in Leveraged Buy Out (LBO) acquisitions. It analyzes how the threat of prematurely exit of the LBO investor improves the agents' incentives when there is asymmetric information. We consider a dynamic agency model with two periods and three agents: the entrepreneur, the LBO investor and the bank. The two first agents provide unobservable efforts to enhance the productivity of their project. At the end of the starting stage, the LBO investor may abandon the entrepreneur's project. He must then pay compensation cost to the entrepreneur and to the bank. We show that there are no debt-equity contracts that induce the entrepreneur and the LBO investor to provide the first-best levels of efforts. The write-off threat increases the agents' incentives. Moreover, the entrepreneur's incentives increase when the amount of debt decreases and when the LBO investor promises her the whole compensation cost. Keywords: Leveraged Buy Out, incentives, exit, write-off option, double moral hazard. JEL classification: D82, D92, G33, G34.
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