The Journal of Finance

Conflicts of Interest and Market Illiquidity in Bankruptcy Auctions: Theory and Tests

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00302

Per Strömberg

I develop and estimate a model of cash auction bankruptcy using data on 205 Swedish firms. The results challenge arguments that cash auctions, as compared to reorganizations, are immune to conflicts of interest between claimholders but lead to inefficient liquidations. I show that a sale of the assets back to incumbent management is a common bankruptcy outcome. Sale‐backs are more likely when they favor the bank at the expense of other creditors. On the other hand, inefficient liquidations are frequently avoided through sale‐backs when markets are illiquid, that is, when industry indebtedness is high and the firm has few nonspecific assets.

Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00696.x

STEVEN N. KAPLAN, PER STRÖMBERG

We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs describe the strengths and risks of the investments as well as expected postinvestment actions. We classify the risks into three categories and relate them to the allocation of cash flow rights, contingencies, control rights, and liquidation rights between VCs and entrepreneurs. The risk results suggest that agency and hold‐up problems are important to contract design and monitoring, but that risk sharing is not. Greater VC control is associated with increased management intervention, while greater VC equity incentives are associated with increased value‐added support.

Private Equity and Long‐Run Investment: The Case of Innovation

Published: 03/21/2011   |   DOI: 10.1111/j.1540-6261.2010.01639.x

JOSH LERNER, MORTEN SORENSEN, PER STRÖMBERG

A long‐standing controversy is whether leveraged buyouts (LBOs) relieve managers from short‐term pressures from public shareholders, or whether LBO funds themselves sacrifice long‐term growth to boost short‐term performance. We examine one form of long‐run activity, namely, investments in innovation as measured by patenting activity. Based on 472 LBO transactions, we find no evidence that LBOs sacrifice long‐term investments. LBO firm patents are more cited (a proxy for economic importance), show no shifts in the fundamental nature of the research, and become more concentrated in important areas of companies' innovative portfolios.

Why Are Buyouts Levered? The Financial Structure of Private Equity Funds

Published: 07/16/2009   |   DOI: 10.1111/j.1540-6261.2009.01473.x

ULF AXELSON, PER STRÖMBERG, MICHAEL S. WEISBACH

Private equity funds are important to the economy, yet there is little analysis explaining their financial structure. In our model the financial structure minimizes agency conflicts between fund managers and investors. Relative to financing each deal separately, raising a fund where the manager receives a fraction of aggregate excess returns reduces incentives to make bad investments. Efficiency is further improved by requiring funds to also use deal‐by‐deal debt financing, which becomes unavailable in states where internal discipline fails. Private equity investment becomes highly sensitive to aggregate credit conditions and investments in bad states outperform investments in good states.

Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies

Published: 01/23/2009   |   DOI: 10.1111/j.1540-6261.2008.01429.x

STEVEN N. KAPLAN, BERK A. SENSOY, PER STRÖMBERG

We study how firm characteristics evolve from early business plan to initial public offering (IPO) to public company for 50 venture capital (VC)‐financed companies. Firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to alienable asset formation. We obtain similar results using all 2004 IPOs, suggesting that our main results are not specific to VC‐backed firms or the time period. The results suggest that, at the margin, investors in start‐ups should place more weight on the business (“the horse”) than on the management team (“the jockey”). The results also inform theories of the firm.

Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts

Published: 07/26/2013   |   DOI: 10.1111/jofi.12082

ULF AXELSON, TIM JENKINSON, PER STRÖMBERG, MICHAEL S. WEISBACH

Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories. Using a large, international sample of buyouts from 1980 to 2008, we find that buyout leverage is unrelated to the cross‐sectional factors, suggested by traditional capital structure theories, that drive public firm leverage. Instead, variation in economy‐wide credit conditions is the main determinant of leverage in buyouts. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.