Journal of financial economics vol:48 issue:3 pages:283-332
This paper investigates the motivations for and consequences of including a broad group of employees in leveraged buyouts by comparing employee buyouts (EBOs) to transactions where only top level managers participate, or management buyouts (MBOs). We examine the implications of including employees in a buyout from a labor contracting, financing, and management control point of view. A major finding is that employee participation helps to finance the buyout. The EBO allows firms to gain access to excess pension assets by converting employees' defined benefit pension capital into equity claims, thus freeing the excess assets in the pension plan to help fund the buyout. Also, employee participation substitutes equity claims for cash labor compensation costs and therefore allows the firm to borrow more than otherwise would be possible. There is also evidence consistent with managers including employees to maintain or enhance incumbent management's control. (C) 1998 Elsevier Science S.A. All rights reserved.