Leveraged Buyouts and Financial Distress

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 for each company, previous studies seem to fail to find any supporting empirical evidence. Using a propensity score matching method, we provide new evidence that is consistent with the prediction of the theory. Tracking a sample of 484 public to private LBOs for 10 years after going private, we find a bankruptcy rate of approximately 20%, an order of magnitude greater than the 2% bankruptcy rate for the control sample. Our analysis is robust to macro and industry shocks as potential driving forces behind bankruptcy.

Keywords: Leveraged Buyouts, Private Equity, Financial Distress, Bankruptcy

JEL Classification: G33; G34; G38; G32; J08