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

Tykvová, Tereza ; Borell, Mariela

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URN: urn:nbn:de:bsz:180-madoc-313662
Document Type: Working paper
Year of publication: 2011
The title of a journal, publication series: ZEW Discussion Papers
Volume: 11-076
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: G20 , G24 , G34,
Subject headings (SWD): Europa , Private Equity , Übernahme , Unternehmen , Verschuldungsrestriktion , Insolvenz , Konkurs
Keywords (English): Private equity , buyout , financial distress , bankruptcy
Abstract: There is some controversy on the key sources of success in the private equity model and on how this business model affects the portfolio companies. We investigate financial tress 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 paper suggests that private equity investors select companies which are less financially distressed than comparable 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 non-buyout companies. In fact, when companies are backed by experienced private equity funds, their bankruptcy rates are even lower. Experienced investors seem to be better able to manage distress risks than their inexperienced counterparts.

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