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Leveraged buyouts and financial distress

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  • Ayash, Brian
  • Rastad, Mahdi

Abstract

Do leveraged buyout transactions increase the chance of bankruptcy? While corporate finance theory predicts that such sharp changes in capital structure increase financial distress costs by raising the probability of bankruptcy, previous studies fail to measure the effect. In this letter, we provide evidence that is consistent with the prediction of the theory. Tracking a sample of 484 leveraged buyouts and propensity score matched control firms for 10 years, we find that these transaction increase the probability of bankruptcy for the target firm by approximately 18%.

Suggested Citation

  • Ayash, Brian & Rastad, Mahdi, 2021. "Leveraged buyouts and financial distress," Finance Research Letters, Elsevier, vol. 38(C).
    • Handle: RePEc:eee:finlet:v:38:y:2021:i:c:s1544612320301549
    DOI: 10.1016/j.frl.2020.101452
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    9. Ayash, Brian & Schütt, Harm, 2016. "Does going private add value through operating improvements?," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 192-215.
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    Cited by:

    1. Iioka, Yasutake & Yamada, Yuji, 2023. "The evolution of capital structure and debt governance: Evidence from private equity-backed companies in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    2. Sakshi Sharma & Kunjana Malik & Manmeet Kaur & Neha Saini, 2023. "Mapping research in the field of private equity: a bibliometric analysis," Management Review Quarterly, Springer, vol. 73(1), pages 61-89, February.
    3. Yu Zhao & Huaming Du & Qing Li & Fuzhen Zhuang & Ji Liu & Gang Kou, 2022. "A Comprehensive Survey on Enterprise Financial Risk Analysis from Big Data Perspective," Papers 2211.14997, arXiv.org, revised May 2023.
    4. Ulrike Schaede, 2022. "The Digital Transformation (DX) and the Financialization of Japan: A Case Study of Private Equity," IMES Discussion Paper Series 22-E-18, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Olsson, Martin & Tåg, Joacim, 2023. "From Wall Street to Work Floor: How Private Equity Buyouts Affect Workers," Working Paper Series 1475, Research Institute of Industrial Economics.

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    More about this item

    Keywords

    Leveraged buyouts; Private equity; Financial distress; Bankruptcy;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies

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