Illegal Buyouts

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Abstract
This paper empirically examines the effects of LBO regulations on the structure of LBO transactions based on data from Italy from 1999-2006. We show that rendering LBOs illegal prior to 2004 reduced the frequency of LBOs in Italy but did not exclude them altogether. Rather, it inhibited efficient LBO structure by causing private equity managers to focus on evading regulations. During the period of illegality, LBO investors held minority portion of board seats, fewer control rights and smaller equity ownership percentages. Moreover, LBOs were more intensively screened for the fit ('agreeableness') with the target firm management. By contrast, during the period of legality LBOs were more intensively screened for the quality of the business plan in reference to market conditions and the ability to efficiently structure the investment. Overall, the data are consistent with the view that uncertainty regarding the legal validity of LBOs impedes efficient governance and distorts decision making.