eISSN: 2791-173X editor@grpublishing.org
All Journals
Submit your article

Global Multidisciplinary Journal

Open Access Peer Review International
Open Access

Private Equity, Leverage, and Distress Resolution: Governance, Investment Behavior, and Long-Run Value in Leveraged Buyouts

DOI
pdf
Dr. Emma L. Carter 1 ,
4 University of Melbourne

Abstract

This paper examines the multifaceted relationships among private equity ownership, leverage, operational transformation, and the resolution of financial distress in leveraged buyouts (LBOs). Drawing on foundational theoretical contributions and an extensive empirical literature, the article integrates governance theories of agency and monitoring with evidence on operating performance, investment patterns, bankruptcy processes, and post-distress restructuring under private equity stewardship (Jensen, 1989; Kaplan, 1989; Kaplan, 1991; Kaplan & Strömberg, 2009). Building from productivity and ownership-change studies and contemporary analyses of distress resolution, the paper synthesizes perspectives that explain when private equity sponsors create value and when they raise the risk of distress or fire-sale outcomes (Lichtenberg & Siegel, 1987; Hotchkiss, Stromberg & Smith, 2021; LoPucki & Doherty, 2002; LoPucki & Doherty, 2007). The contribution is a richly elaborated theoretical narrative that connects sponsor incentives, debt design (including payment-in-kind instruments), and legal-institutional environments to firm-level outcomes, while evaluating conflicting empirical findings concerning innovation, long-run investment, and systemic implications for stakeholders including employees, creditors, and consumers (Lerner, Sorensen & Strömberg, forthcoming; Morgenson & Rizzo, 2018; Tykvova & Borell, 2012). The paper also integrates recent sectoral and health-care-related evidence on private equity ownership effects on operational outcomes and quality measures (Borsa et al., 2023) and incorporates new research on PIK amendments and capital-structure outcomes in sponsor-backed LBOs (Shounik, 2025). The discussion emphasizes mechanistic explanations, counterarguments, and boundary conditions that reconcile heterogenous results in the literature and proposes a research agenda to clarify causal pathways linking private equity control, leverage dynamics, and long-run firm value.

Keywords

private equity, leveraged buyouts, financial distress, governance

References

📄 Jensen, M., 1989, "Eclipse of the public corporation," Harvard Business Review, Sep-Oct, 61-74.
📄 Kaplan, S. N., 1989, "The Effects of Management Buyouts on Operating Performance and Value," Journal of Financial Economics, 24, 217-254.
📄 Kaplan, S. N. 1991. "The staying power of leveraged buy-outs," Journal of Financial Economics, 29, 287-313.
📄 Kaplan, S. N. and P. Strömberg, 2009, "Leveraged buyouts and Private Equity," Journal of Economic Perspectives, forthcoming.
📄 Lerner, J., M. Sorensen, and P. Strömberg, forthcoming, "Private equity and long run investment: the case of innovation," Journal of Finance.
📄 Lichtenberg, F.R. and D. Siegel (1987), “Productivity and Changes in Ownership of Manufacturing Plants,” Brookings Papers on Economic Activity: Microeconomics 643-683.
📄 Ljungqvist, A., M. Richardson and D. Wolfenzon, "The investment behavior of buyout funds," Working Paper, 2007.
📄 LoPucki, L., and J. Doherty, 2002, "Why are Delaware and New York bankruptcy reorganizations failing?," Vanderbilt Law Review 1933, 1939.
📄 LoPucki, L., and J. Doherty, 2007, "Bankruptcy fire sales," working paper, UCLA School of Law.
📄 LoPucki, L. and S. Kalin, 2001, "The Failure of Public Company Bankruptcies in Delaware and New York: Empirical Evidence of a 'Race to the Bottom'," Vanderbilt Law Review 54, 231-282.
📄 Shounik, S. (2025). Runway extension or value erosion? A difference-in-differences study of PIK amendments and capital-structure outcomes in U.S. sponsor-backed LBOs (2020–2025). International Journal of Applied Mathematics, 38(10s), 1617–1634.
📄 McConnell, J. and H. Servaes, 1991, "The economics of prepackaged bankruptcy," Journal of Applied Corporate Finance 4(2), 93-97.
📄 Hotchkiss, Edith S. and Stromberg, Per and Smith, David Carl, 2021, “Private Equity and the Resolution of Financial Distress”. AFA 2012 Chicago Meetings Paper, ECGI - Finance Working Paper No. 331/2012.
📄 Morgenson, Gretchen, and Lillian Rizzo. 2018, “Who Killed Toys 'R' Us? Hint: It Wasn't Only Amazon.” The Wall Street Journal, Dow Jones & Company.
📄 Tykvova, T. and M. Borell, 2012, “Do private equity owners increase risk of financial distress and bankruptcy?” Journal of Corporate Finance 18, 138-150.
📄 A Borsa, G Bejarano, M Ellen, J D Bruch, Evaluating trends in private equity ownership and impacts on health outcomes, costs, and quality: systematic review, BMJ, 2023.
📄 H Bruining, E Verwaal, Successful Management Buyouts: Are They Really More Entrepreneurial?, 2005.
📄 L C Chi, How have banks fared following a borrower's financial distress? Economic Modelling, volume 26, issue 2, p. 480 - 488, 2009.
📄 E Choijil, C Mendez, W Wong, J Vieito, M Batmunkh, Thirty years of herd behavior in financial markets: a bibliometric analysis, Res. Int. Bus. Financ., volume 59, 2022.

How to Cite

Dr. Emma L. Carter. (2025). Private Equity, Leverage, and Distress Resolution: Governance, Investment Behavior, and Long-Run Value in Leveraged Buyouts. Global Multidisciplinary Journal, 4(12), 1-9. https://www.grpublishing.org/journals/index.php/gmj/article/view/212

Most read articles by the same author(s)

1 2 3 4 5 6 7 8 9 10 > >> 

Similar Articles

1-10 of 60

You may also start an advanced similarity search for this article.