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Do private equity owners increase risk of financial distress and bankruptcy?

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  • Tykvová, Tereza
  • Borell, Mariela

Abstract

In this study, we investigate financial distress risks of European companies around the buyout event in the period between 2000 and 2008. In addition, we analyze whether buyout companies go bankrupt more often than comparable non-buyout companies. Our results suggest that private equity investors select companies which are less financially distressed than comparable non-buyout companies and that the distress risk increases after the buyout. Despite this increase, private equity-backed companies do not suffer from higher bankruptcy rates than comparable non-buyout companies. In fact, when companies are backed by experienced private equity funds, their bankruptcy rates are even lower. These findings indicate that experienced investors are better able to manage distress risks than their inexperienced counterparts.

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  • Tykvová, Tereza & Borell, Mariela, 2012. "Do private equity owners increase risk of financial distress and bankruptcy?," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 138-150.
  • Handle: RePEc:eee:corfin:v:18:y:2012:i:1:p:138-150 DOI: 10.1016/j.jcorpfin.2011.11.004
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    Cited by:

    1. Kamoto, Shinsuke, 2017. "Managerial innovation incentives, management buyouts, and shareholders' intolerance of failure," Journal of Corporate Finance, Elsevier, pages 55-74.
    2. Borell, Mariela & Heger, Diana, 2013. "Sources of value creation through private equity-backed mergers and acquisitions: The case of buy-and-build strategies," ZEW Discussion Papers 13-094, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Grupp, Marcel, 2015. "On the impact of leveraged buyouts on bank systemic risk," SAFE Working Paper Series 101, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    4. Mateev, Miroslav & Andonov, Kristiyan, 2016. "Do cross-border and domestic bidding firms perform differently? New evidence from continental Europe and the UK," Research in International Business and Finance, Elsevier, pages 327-349.
    5. Paglia, John K. & Harjoto, Maretno A., 2014. "The effects of private equity and venture capital on sales and employment growth in small and medium-sized businesses," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 177-197.
    6. repec:eee:corfin:v:45:y:2017:i:c:p:31-63 is not listed on IDEAS
    7. Bertoni, Fabio & Lugo, Stefano, 2014. "The effect of sovereign wealth funds on the credit risk of their portfolio companies," Journal of Corporate Finance, Elsevier, pages 21-35.
    8. Annalisa Croce & Diego D’Adda & Elisa Ughetto, 2015. "Venture capital financing and the financial distress risk of portfolio firms: How independent and bank-affiliated investors differ," Small Business Economics, Springer, pages 189-206.
    9. repec:enr:rpaper:0008 is not listed on IDEAS
    10. Leonel Arango Vásquez & Eduardo Alexander Duque Grisales, 2016. "Capital riesgo y dinero inteligente: aportes de valor no monetario," CONTEXTO (ARTICULOS SOBRE ECONOMÍA), UNIVERSIDAD EXTERNADO DE COLOMBIA, February.
    11. Campa, Domenico & Camacho-Miñano, María-del-Mar, 2015. "The impact of SME’s pre-bankruptcy financial distress on earnings management tools," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 222-234.
    12. Elisa Luciano & Giovanna Nicodano, 2012. "Default risk in business groups," Carlo Alberto Notebooks 283, Collegio Carlo Alberto.
    13. Scellato, Giuseppe & Ughetto, Elisa, 2013. "Real effects of private equity investments: Evidence from European buyouts," Journal of Business Research, Elsevier, vol. 66(12), pages 2642-2649.

    More about this item

    Keywords

    Private equity; Buyout; Financial distress; Bankruptcy;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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