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

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  • Abhishek Bhardwaj
  • Abhinav Gupta
  • Sabrina T. Howell

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.

Suggested Citation

  • Abhishek Bhardwaj & Abhinav Gupta & Sabrina T. Howell, 2025. "Leveraged Payouts: How Using New Debt to Pay Returns in Private Equity Affects Firms, Employees, Creditors, and Investors," Working Papers 25-12, Center for Economic Studies, U.S. Census Bureau.
    • Handle: RePEc:cen:wpaper:25-12
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    File URL: https://www2.census.gov/library/working-papers/2025/adrm/ces/CES-WP-25-12.pdf
    File Function: First version, 2025
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