The Harm and Regulation of High-leverage Multiple Behaviors in LBOs

Abstract

In recent years, as the development of our capital market gradually tends to mature, the number of mergers and acquisitions (M&A) of all kinds of enterprises also begins to present an increasing trend. Leveraged buyout (LBO), as a very clever acquisition form, is favored by many enterprises. However, in the context of imperfect laws and regulations, enterprises and individuals make irrational behaviors driven by extremely high interests, and one of them is blindly raising leverage multiple in pursuit of returns, it has brought a bad influence on the market, enterprises, and individuals. To create a favorable business environment, measurements have to be taken to regulate the overhigh leverage of multiple behaviors in LBOs. The essay uses the method of case study and comparative study. The most typical LBO case will be presented as an introduction, and then some other good cases will be mentioned later to illustrate the characteristics of LBO and the harms of high multiple in LBO and so on. To compensate for the harms that high leverage multiple in LBO bring to the market, enterprises and individuals, several solutions have been raised, including clarifying the principle of good faith in MBOs, improving the system of regulatory rules for the capital market, optimizing the information disclosure system of leveraged buyouts and increasing punishment for illegal speculative activities. The detailed argument will be elaborated on later.