Determinants of leverage in private equity led buyouts : An empirical study on transactions from 2015–2019
Hurtig, Saku (2020-05-18)
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Capital structure is one of the most researched and debated subjects in the field of finance. Private equity has taken a significant role in the field of mergers and acquisitions. However, the determinants behind the capital structure of leveraged buyouts (LBO) has not been researched extensively. The leveraged buyout transaction is ideal for performing cross-sectional analysis on the capital structure since it is a true refinancing point as the whole capital structure is restructured. The purpose of this thesis is to study the determining factors behind leverage in LBOs by examining a unique self-constructed data set consisting of 61 transactions completed between 2015 and 2019. Additionally, a sample of comparable public companies has been assembled based on the characteristics of the firms in the LBO sample. The determinants of capital structure in leveraged buyouts are studied with ordinary least squares regression. The public sample is studied with fixed effects panel regression. The public sample covers a time period of five years, from 2014 to 2018. Debt to enterprise value is used as the dependent variable in the regressions. The independent variables are size, growth opportunities, profitability, tangibility, and credit market conditions. The independent variables used in the study are based on the findings of prior studies and the prominent capital structure theories, such as trade-off, agency costs, pecking order, and market timing theory. The results of the study suggest that firm characteristics such as tangibility, growth opportunities, and profitability have a statistically significant influence on the capital structure choice in leveraged buyouts. The results support the trade-off theory as all the significant coefficients are in line with its predictions. No statistically significant impact of credit market conditions was found in the study. Tangibility was the only statistically significant determinant in the public company regression. The correlation between the capital structure of LBOs and peer public companies is low, and the leverage in LBOs appears to be affected by more variables compared to public companies. Therefore, the results of this study do not support the notion of optimal capital structure.