Specialization of Private Equity Firms and Corporate Financial Distress

12 Pages Posted: 21 Mar 2015 Last revised: 27 Nov 2023

See all articles by Benjamin Hammer

Benjamin Hammer

Lancaster University - Department of Accounting and Finance

Robert Loos

HHL Leipzig Graduate School of Management

Lukas Andreas Oswald

HHL Leipzig Graduate School of Management

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Date Written: November 20, 2023

Abstract

We investigate the impact of sector specialization of private equity firms on the distress risk of portfolio companies as proxied by Altman’s Z-Score. Using a matched sample of 25728 firm-year observations, we find that distress risk increases through private equity backing. The effect is stronger for firms backed by specialists rather than generalists. This is because specialist-backed firms have lower distress risk ex ante. Overall, our results are consistent with a “cherry-picking hypothesis.” It suggests that specialists use their superior skills in information production to find less distressed targets, which allows them to increase risk more after the buyout.

Keywords: Leveraged buyout, bankruptcy, default risk, Altman Z-Score, industry specialization

JEL Classification: G23, G24, G32, G33, G34

Suggested Citation

Hammer, Benjamin and Loos, Robert and Oswald, Lukas Andreas and Schwetzler, Bernhard, Specialization of Private Equity Firms and Corporate Financial Distress (November 20, 2023). Available at SSRN: https://ssrn.com/abstract=2580910 or http://dx.doi.org/10.2139/ssrn.2580910

Benjamin Hammer (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Robert Loos

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, D-04109
Germany

Lukas Andreas Oswald

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, 04109
Germany

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance ( email )

Jahnallee 59
D-04109 Leipzig
Germany
+49-341-9851-685 (Phone)
+49-341-9851-689 (Fax)

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