Measuring Idiosyncratic Risks in Leveraged Buyout Transactions

A. Groh, R. Baule, O. GOTTSCHALG

Quarterly Journal of Finance and Accounting

automne 2008, vol. 47, n°4, pp.5-24

Départements : Stratégie et Politique d’Entreprise, GREGHEC (CNRS)

We use a contingent claims analysis model to calculate the idiosyncratic risks in Leveraged Buyout transactions. A decisive feature of the model is the consideration of amortization. From the model, asset value volatility and equity value volatility can be derived via a numerical procedure. For a sample of 40 Leveraged Buyout transactions we determine the necessary model parameters and calculate the implied idiosyncratic risks. We verify the expected model sensitivities by varying the input parameters. For the first time, we are able to calculate Sharpe Ratios for individual Leveraged Buyouts, thereby fully incorporating the leverage risks