The evolution of capital structure and debt governance: Evidence from private equity-backed companies in Japan

This study aims to clarify how leverage is effectively utilized in private equity (PE)-backed buyouts by investigating the empirical performance of PE investment in Japan as an emerging yet growing PE market. Based on data on PE-backed buyouts in Japan, we show that the capital structure of post-buyout companies changes towards higher leverage, and that a relatively higher level of leverage is observed for public-to-private deals and/or buyouts by PE firms with higher reputations. Moreover, the more leverage an investee company has, the more disciplined the management is while a PE firm secures the post-buyout investment return. We conclude that the level, determinants, and functions of the leverage of investee companies are influenced by attributes of individual deals, as well as the financial system and/or corporate culture of companies. •Unique study analyzing PE investments in Japan, an emerging yet growing market•Comprehensively demonstrate the level, determinants, and functions of leverage•Present debt governance for management through improved business operations•Discuss leverage levels considering corporate culture focusing on corporate survival•Shed new light on the mechanisms of leverage in a bank-oriented financial system