Private Equity and Financial Fragility During the Crisis

by Shai Bernstein, Josh Lerner, and Filippo Mezzanotti

Overview — Examining the activity of almost 500 private equity-backed companies during the 2008 financial crisis, this study finds that during a time in which capital formation dropped dramatically, PE-backed companies invested more aggressively than peer companies did. Results do not support the hypothesis that private equity contributed to the fragility of the economy during the recent financial crisis.

Author Abstract

Do private equity firms contribute to financial fragility during economic crises? We find that during the 2008 financial crisis, PE-backed companies increased investments relative to their peers, while also experiencing greater equity and debt inflows. The effects are stronger among financially constrained companies and those whose private equity investors had more resources at the onset of the crisis. PE-backed companies consequentially experienced higher asset growth and increased market share during the crisis.

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