Illegal Buyouts

Short Abstract -- (as published) This study empirically examines the effects of a regulation change on the structure and governance of leveraged buyouts (LBOs) within the Italian private equity market, whose transactions were only recently legalized. With a new data set covering approximately 85% of the buyout funds active in Italy during the period of 1999-2006, we find that a regulation that prohibits LBOs can reduce their frequency, but does not exclude them altogether. Rather, it inhibits efficient governance and distorts decision making. Overall, the data are consistent with the view that laws prohibiting LBOs result in less efficient LBO arrangements. --Extended Abstract -- The purpose of this study is to empirically analyze the effects of a regulation change on the structure of leveraged buyout (LBO) deals and the governance of the investee firms within the Italian private equity market, whose transactions were only recently legalized. A worldwide debate in the law and finance literature argues that leveraged buyouts (LBOs) should be prohibited or at least heavily regulated, as it occurred in Italy until recently. In 2004, the Italian Government introduced a new corporate governance law aimed at legalizing LBO transactions under a set of conditions. We use a new data set that includes 103 LBO deals, covering approximately 85% of the buyout funds active in Italy during the period of 1999-2006. We find that a regulation that prohibits LBOs can reduce their frequency, but does not exclude them altogether. Rather, it inhibits efficient governance and distorts decision making. Overall, the data are consistent with the view that laws prohibiting LBOs result in less efficient LBO arrangements. (C) 2009 Elsevier B.V. All rights reserved.