Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 18, 2020 erstellt
Beschreibung:
Detractors have warned that Private Equity (PE) funds tend to over-lever their portfolio companies because of an option-like payoff, building up debt overhang and widespread bankruptcy risks. Drawing on standard trade-off theory, this paper argues PE-ownership leads to higher levels of optimal (value-maximizing) leverage. I embed key features of PE-ownership into a model of firm value and leverage. Using a large sample of PE-sponsored leveraged buyouts (LBO), the estimated model fully explains both the level and change in leverage ratios in the data following PE-takeover. Higher levels of optimal leverage arise endogenously from greater tax benefits and particularly lower expected distress costs, driven by (i) lower asset risk (ii) higher expected future return and (iii) lower bankruptcy costs. Counterfactual analysis reveals substantial loss in firm value if PE sub-optimally chose lower leverage. Post-LBO, I estimate Distance-to-Default increases by 28 percent and credit spreads narrow by 3.6 percentage points for the median firm, suggesting concerns about default risks may have been overstated. Additional tests show PE-backed firms generate higher returns and receive greater equity injections relative to matched controls if they fall into financial distress, corroborating both the tax benefit and distress cost channels. My results suggest new policies regulating leveraged loans should focus on optimal risk at the firm-level