Publication Type
Working Paper
Version
publishedVersion
Publication Date
3-2022
Abstract
This paper presents new evidence on the economic role of private equity buyouts by exploiting the staggered adoption of the constructive fraud provision by U.S. state courts. The law unintentionally shifts the credit default risk borne by existing unsecured creditors of the buyout target to the selling shareholders and lenders in the form of ex-post litigation risk, thereby discouraging buyout activity. Using a difference-in-differences framework, I find that firms raise less capital, reduce payouts and investments, and form alliances with employees. Firms also avoid positive NPV projects that carry too much risk. These findings are consistent with managers enjoying a quiet life. Further analysis indicates that this behavior of managers adversely affects creditors.
Keywords
Private equity, Buyout activity, Firm behavior, Corporate governance
Discipline
Finance | Finance and Financial Management
First Page
1
Last Page
47
Publisher
Singapore Management University Lee Kong Chian School of Business Research Paper Series
City or Country
Singapore
Citation
LO, Yi-hsin.
How do firms respond to reduced private equity buyout activity?. (2022). 1-47.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7024
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
External URL
https://doi.org/10.2139/ssrn.4040663