We study the structure of public firm buyouts in a model that features the Berle-Means problem (lack of incentives) and the Grossman-Hart problem (holdout). We find that bootstrapping, debt in excess of funding needs, and upfront fees to bidders are socially optimal and increase buyout premiums. These elements make LBO financing tantamount to a “management contract” arranged by an outside manager to receive cash and incentives to manage a firm—except the cash is funded by excess debt imposed on the firm. Our model also rationalizes why PE firms collect fees from their equity partnerships and directly from target firms.

It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Therefore, suppliers may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes. Among other things, the model explains why trade credit has short maturity, why trade credit is more prevalent in less developed credit markets, and why accounts payable of large unrated firms are more countercyclical than those of small firms.

We analyze control transfers in firms with a dominant minority blockholder and otherwise dispersed owners, and show that the transaction mode is important. Negotiated block trades preserve a low level of ownership concentration, inducing more inefficient extraction of private benefits. In contrast, public acquisitions increase ownership concentration, resulting in fewer private benefits and higher firm value. Within our model, the incumbent and new controlling party prefer to trade the block because of the dispersed shareholders' free‐riding behavior. We also explore the regulatory implications of this agency problem and its impact on the terms of block trades.

Posttakeover moral hazard by the acquirer and free‐riding by the target shareholders lead the former to acquire as few sharcs as necessary to gain control. As moral hazard is most severe under such low ownership concentration, inefficiencies arise in successful takeovers. Moreover, share supply is shown to be upward‐sloping. Rules promoting ownership concentration limit both agency costs and the occurrence of takeovers. Furthermore, higher takeover premia induced by competition translate into higher ownership concen‐tration and are thus beneficial. Finally, one share‐one vote and simple majority are generally not optimal, and socially optimal rules need not emerge through private contracting.

We relate trade credit to product characteristics and aspects of bank-rm relationships and document three main empirical regularities. First, the use of trade credit is associated with the nature of the transacted good. In particular, suppliers of dierentiated products and services have larger accounts receivable than suppliers of standardized goods and rms buying more services receive cheaper trade credit for longer periods. Second, rms receiving trade credit secure nancing from relatively uninformed banks. Third, a majority of the rms in our sample appears to receive trade credit at low cost.

Widening and Deepening: Reforming the European Union by Erik Berglof, Mike Burkart, Guido Friebel and Elena Paltseva. Published in volume 98, issue 2, pages 133-37 of American Economic Review, May 2008

This paper examines the role of legal investor protection for the efficiency of the market for corporate control when bidders are financially constrained. In the model, stronger legal investor protection increases bidders' outside funding capacity. However, absent effective bidding competition, this does not improve efficiency, as the bid price, and thus bidders' need for funds, increases one‐for‐one with the pledgeable income. In contrast, under effective competition for the target, the increased outside funding capacity improves efficiency by making it less likely that more efficient but less wealthy bidders are outbid by less efficient but wealthier rivals.