Management Buy-outs and Venture Capital
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Management Buy-outs and Venture Capital

Into the Next Millennium

Edited by Mike Wright and Ken Robbie

This book presents up-to-date evidence on the issues facing financiers and intermediaries involved in venture capital and management buy-outs. It provides a comprehensive review of existing literature and an analysis of international trends in market development as well as a global comparison of the major issues.
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Chapter 7: Loan covenants, relationship banking and management buy-outs in default: a comparative study of the UK and Holland

David Citron, Ken Robbie, Mike Wright, Hans Bruining and Arthur Herst

Extract

Page 153 7.  Loan covenants, relationship banking and management buy­outs in default: a comparative  study of the UK and Holland David Citron, Ken Robbie, Mike Wright, Hans Bruining and Arthur Herst Introduction Jensen (1986) and Wruck (1990) argue that leveraged buyout firms achieve operating efficiencies due to the discipline and monitoring imposed by high leverage.  Furthermore, if such firms become distressed, timely loan default should ensure that they are more likely to be rescued before their going concern value dissipates.  Beneish and Press (1995a), however, find for non­LBOs in default that the cost of additional constraints imposed by lenders outweighs the benefits of increased  monitoring. Furthermore, studies of firms breaching covenants have focused on those firms that have violated accounting­based covenants alone (see for example Beneish and  Press, 1993, and Chen and Wei, 1993, on the costs of breach; DeFond and Jiambalvo, 1994, and Sweeney, 1994, on accounting responses to breaches). However,  lenders often require a range of both accounting­based and non­accounting­based covenants and it is possible that these interact as firms approach default. In this spirit  Smith (1993) suggests that research into technical default needs to be integrated into a broader view of the lending process (p. 301). Similarly Singh (1993) makes a  plea for introducing more institutional detail into studies of corporate restructuring, by which he means ‘a precise understanding of the actual mechanics of decision  making’ (p. 164).  This chapter focuses on the role of both accounting­based covenants and other...

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