What drives financial distress risk and default rates of leveraged buyout targets? : empirical evidence from european transactions

Abstract

Recent studies show that private equity ownership leads to increasing risk of financial distress of their target companies, yet not resulting in higher default rates. But can this be observed in all European countries? And how can potential differences be explained? Based on an extensive set of accounting data covering target companies acquired in the period between 1997 and 2014 in 16 European countries, we employ panel data regressions to answer these questions. Our results show differences among European countries and suggest that larger capital markets, in particular debt markets, and stronger creditor protection regimes are associated with lower financial distress risk. However, default rates seam not to be affected by these drivers.