The structure of leveraged buyouts and the free-rider problem

Burkart, Mike ORCID: 0000-0002-0954-4499, Lee, Samuel and Petri, Henrik (2025) The structure of leveraged buyouts and the free-rider problem. Review of Financial Studies. ISSN 0893-9454 (In Press)

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Abstract

We study the structure of public firm buyouts in a model that features the Berle-Means problem (lack of incentives) and the Grossman-Hart problem (holdout). We find that bootstrapping, debt in excess of funding needs, and upfront fees to bidders are socially optimal and increase buyout premiums. These elements make LBO financing tantamount to a “management contract” arranged by an outside manager to receive cash and incentives to manage a firm—except the cash is funded by excess debt imposed on the firm. Our model also rationalizes why PE firms collect fees from their equity partnerships and directly from target firms.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
JEL classification:	G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Date Deposited:	17 Sep 2025 08:18
Last Modified:	03 Oct 2025 11:15
URI:	http://eprints.lse.ac.uk/id/eprint/129543

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