Information asymmetry in LBO financing: a contractual approach.

Summary The purpose of this thesis is to study the financial structure of LBOs and its impact on incentives to invest in the presence of informational asymmetry. The first chapter presents a statistical overview of the American, European and French LBO markets. We present the factors and sources of risk in these deals. The second chapter presents a review of the literature on leverage. This literature suggests that debt reduces the divergence of interests between shareholders and management and between shareholders and creditors, takes advantage of tax savings, improves the target's performance and signals its quality in the presence of asymmetric information in the market. However, it can also induce wealth transfers. The third chapter proposes a static double moral hazard model. The presence of the bank induces both agents to make optimal efforts under the condition of decreasing bank payments of income. By considering non-decreasing bank payments the model explains that in the absence of tax, the effort incentives of the entrepreneur and the LBO fund do not depend on the financial structure of the capital. We show that the deduction of debt interest creates an additional success income to be shared between the two agents, which induces them to increase their effort. In the fourth chapter, we study an extension to a dynamic setting of the previous model where the LBO fund can abandon 1 project of the entrepreneur. In case of premature exit, it has to pay compensation. The threat of abandonment induces both agents to increase their efforts. When the amount of the indemnities is exogenous, their distribution depends on the quality of the competing project: if the latter is not very profitable, they are shared between the entrepreneur and the bank. If the project is not very profitable, they are paid in full to the entrepreneur. When the amount of compensation is endogenous, both agents make greater efforts, only the entrepreneur is compensated.