LBO Financing

LBO Financing

Mike Burkart, Samuel Lee, Henrik Petri

Series number :

Serial Number: 

Date posted :

September 11 2020

Last revised :

June 10 2021
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  • Leveraged buyouts • 
  • bootstrap acquisitions • 
  • tender offers • 
  • free-rider problem • 
  • debt overhang • 
  • private equity

We analyze takeover financing in a model where bidders must overcome the free-rider problem to restore ownership incentives. Bootstrapping, “excessive” debt levels, and negative financing contributions by bidders—the controversial traits of leveraged buyouts—emerge as the Pareto efficient takeover bid design.

Takeover debt is crucial to equity consolidation, Pareto sharing of the incentive gains, and efficient takeover competition, all while wealth constraints are slack. These benefits are unique to the market for corporate control, that is, absent outside of takeovers.


Real name:
Fellow, Research Member
London School of Economics and Political Science
Real name:
Research Member
Leavey School of Business, Santa Clara University
Real name:
Henrik Petri