Does Credit Supply Drive the LBO Market? Public Deposited

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  • March 20, 2019
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  • Wang, Yihui
    • Affiliation: Kenan-Flagler Business School
Abstract
  • I examine how supply of credit affects investment and capital structure decisions by studying the leveraged buyout (LBO) market. I employ the structural changes in credit markets that led to the explosion in collateralized debt obligations (CDOs) to identify shocks in credit supply. Using instruments that are not likely affected by credit demand in the LBO market, I show that the easy credit from the CDO market encouraged banks to arrange more loans to finance LBOs, leading to the recent LBO boom. This structured lending supported by CDOs led to cheaper credit, looser covenants, and more aggressive use of bank loans in financing LBOs. However, in sharp contrast to the LBO boom in the late 1980s, this easy credit did not lead to riskier LBO deals. My findings point to the effects of disintermediation of banks as they switched from an originate-and-hold to an originate-and-distribute model.
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  • In Copyright
Advisor
  • Shivdasani, Anil
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