The IPO market provides an interesting setting for examining the behavior of private equity (PE) sponsors due to the higher information asymmetries it involves compared to other exit strategies. Contrary to the hypothesis that PE sponsors are more professional than other insiders in using the IPO market to expropriate investors, I do not find significant differences between PE-backed IPOs and comparable IPOs of stand-alone companies. PE sponsors do not target their IPOs in “hot” periods any more than would managers of stand-alone companies, nor are they more prone to rush their companies into premature IPOs. They also do not inflate valuations and are not more likely to seek to sell firms with poor prospects (“unload lemons”) onto the market. Studying the post-IPO period, I find that IPOs that take place in hot periods are significantly more likely to delist due to default, but this result is not any stronger for PE-backed IPOs. Throughout paper, I make a distinction between buyout-backed and venture-backed IPOs, uncovering some interesting differences but also similarities of the two. The paper provides evidence to contradict media criticism of PE sponsors. It can also have important policy implications regarding the PE regulatory framework. Finally, this work comes as a timely contribution given the increasing importance of PE in the IPO market.

While empirical literature has documented a negative relation between default risk and stock returns, theory suggests that default risk should be positively priced. In this paper, we calculate monthly probabilities of default (PDs) for a large sample of European firms and break them down into systematic and idiosyncratic components. The approach that we follow does not require data on credit spreads, thus it can also be applied to small firms that do not have such data available. In accordance with theory, we find that the systematic part, measured as the PD sensitivity to aggregate default risk, is positively related to stock returns. We show that stocks with higher PDs underperform because they have, on average, higher idiosyncratic risk. Finally, small and value stocks are quite heterogeneous with respect to their exposure to aggregate default risk.

In this paper, we examine idiosyncratic and systematic distress predictors for small and medium sized enterprises (SMEs) in Europe over the period 2000–2009. We find that SMEs across European regions are vulnerable to common idiosyncratic factors but systematic factors vary. Moreover, systematic factors move average distress rates and small SMEs are more vulnerable to these factors compared to large SMEs. By including many very small companies in the sample, our models offer unique insights into the European small business sector. By exploring distress in a multi-country setting, the models uncover regional vulnerabilities. Finally, by incorporating systematic dependencies, the models capture distress co-movements.