Leveraged Buyouts and Financial Distress

25 Pages Posted: 22 Jul 2019

See all articles by Brian Ayash

Brian Ayash

California State Polytechnic University, San Luis Obispo - Finance Area

Mahdi Rastad

Orfalea College of Business, California State Polytechnic University

Date Written: July 20, 2019

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

Suggested Citation

Ayash, Brian and Rastad, Mahdi, Leveraged Buyouts and Financial Distress (July 20, 2019). Available at SSRN: https://ssrn.com/abstract=3423290 or http://dx.doi.org/10.2139/ssrn.3423290

Brian Ayash (Contact Author)

California State Polytechnic University, San Luis Obispo - Finance Area ( email )

College of Business
San Luis Obispo, CA 93407
United States

Mahdi Rastad

Orfalea College of Business, California State Polytechnic University ( email )

San Luis Obispo, CA 93407
United States

HOME PAGE: http://www.cob.calpoly.edu/faculty/mahdi-rastad/

Register to save articles to
your library

Register

Paper statistics

Downloads
399
Abstract Views
2,002
rank
72,931
PlumX Metrics