Capital Structure & Firm Outcomes: Evidence from Dividend Recapitalizations in Private Equity

84 Pages Posted: 4 Feb 2025 Last revised: 18 Apr 2025

See all articles by Abhishek Bhardwaj

Abhishek Bhardwaj

Tulane University

Abhinav Gupta

University of North Carolina (UNC) at Chapel Hill - Finance Area

Sabrina T. Howell

New York University (NYU) - New York University

Date Written: January 2025

Abstract

We study the effect of a large increase in firm leverage. We isolate the independent, causal effect of debt using the setting of private equity-sponsored dividend recapitalizations, where companies take on debt to pay investor returns, and opportunistic responsiveness to credit supply permits a causal design. After accounting for positive selection, higher total debt (84% on average) dramatically increases the chance of financial distress (by 2.4 times the targeted firm mean), in line with Altman-Z calibrations. Dividend recapitalizations increase deal returns but reduce fund returns, possibly reflecting moral hazard. They also reduce employee wages and loan prices for pre-existing creditors.

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Suggested Citation

Bhardwaj, Abhishek and Gupta, Abhinav and T. Howell, Sabrina, Capital Structure & Firm Outcomes: Evidence from Dividend Recapitalizations in Private Equity (January 2025). NBER Working Paper No. w33435, Available at SSRN: https://ssrn.com/abstract=5122154

Abhishek Bhardwaj (Contact Author)

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

Abhinav Gupta

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Sabrina T. Howell

New York University (NYU) - New York University

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