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

Abhishek Bhardwaj, Abhinav Gupta and Sabrina T. Howell

No 33435, NBER Working Papers from National Bureau of Economic Research, Inc

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 dramatically increasing leverage makes firms much riskier. The debt-bankruptcy relationship is in line with Altman-Z model predictions. 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.

JEL-codes: G23 G32 G33 G35 (search for similar items in EconPapers)
Date: 2025-01
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