Leveraged Payouts: How Using New Debt to Pay Returns in Private Equity Affects Firms, Employees, Creditors, and Investors

Abhishek Bhardwaj, Abhinav Gupta and Sabrina T. Howell

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: We study the causal effect of a large increase in firm leverage. Our setting is dividend recapitalizations in private equity (PE), where portfolio companies take on new debt to pay investor returns. After accounting for positive selection into more debt, we show that large leverage increases make firms much riskier, dramatically raising exit and bankruptcy rates but also IPOs. The debt-bankruptcy relationship is in line with Altman-Z model predictions for private firms. Dividend recapitalizations increase deal returns but reduce: (a) wages among surviving firms; (b) pre-existing loan prices; and (c) fund returns, which seems to reflect moral hazard via new fundraising. These results suggest negative implications for employees, pre-existing creditors, and investors.

Date: 2025-01
New Economics Papers: this item is included in nep-cfn and nep-fmk
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www2.census.gov/library/working-papers/2025/adrm/ces/CES-WP-25-12.pdf First version, 2025 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:25-12

Access Statistics for this paper

More papers in Working Papers from U.S. Census Bureau, Center for Economic Studies Contact information at EDIRC.
Bibliographic data for series maintained by Dawn Anderson ().