Managerial incentives and the structure of management buyouts

Management buyouts often occur when incumbent managers have large equity interests in the pre-buyout firms and are typically structured so that managers can increase their share of the outstanding common stock while reducing their dollar investment in the post-buyout firms. We provide a rationale for such observations and develop a model to examine a manager's decisions on the structuring of a buyout, and how the structure of a buyout influences a manager's efforts in the post-buyout firm.