Governed by the Owner or Governed by Debt? The impact of a change in ownership and debt on the working capital management of Private Equity buyouts in Sweden

Abstract: This study examines the impacts of a change in ownership and financial debt on the working capital management of private equity buyouts in the Swedish market. Based on a sample of 134 Swedish buyouts that occurred between the second half of 2009 and first half of 2017, we first analyze the three post buyout-year changes in net working capital, defined as inventory + accounts receivable - accounts payable, followed by investigating the relationship between financial debt/assets and net working capital metrics using post buyout-year panel data. We find significant evidence that net working capital/sales, accounts receivable/sales and inventory/sales have been reduced in the buyout companies compared to pre-buyout levels. Moreover, multivariate regression indicates weak and non-significant negative relationships between financial debt/assets and net working capital/sales, inventory/sales and accounts receivable/sales and non-significant positive relationship between financial debt/assets and accounts payable/sales. Results suggest that a change in ownership to private equity has significant impact on a company's working capital management, potentially explained by the concentrated ownership structure translating into more scrutiny over management decisions, while the observed effects of debt have weaker explanatory value. In conclusion, evidence presented in this study resonates with a notion that the working capital management of buyouts is governed by the owner, and less governed by debt.