Buyout Activity and Asset Prices

53 Pages Posted: 18 May 2011 Last revised: 21 Jun 2013

See all articles by Valentin Haddad

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Erik Loualiche

University of Minnesota, Finance

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: May 16, 2011

Abstract

We develop a model in which leveraged buyout (LBO) transactions are sensitive to variation in pricing conditions. The privatization of the firm generates value by eliminating agency costs that impede the firm’s growth; however, LBO investors require compensation to commit their capital to a single, undiversified project. These quantities are derived in an economy with long-run risk and recursive preferences. We conclude that more buyouts should occur when risk-free rates are high and the risk premium is low. In a panel dataset of public companies from 1980 to 2009, we document that LBO activity is positively related to the risk-free rate and negatively related to expected excess returns. We find the aggregate discount rate, rather than credit specific factors, is an important determinant of LBO activity. We also predict firms with higher exposure to systematic shocks and higher idiosyncratic risk are less likely to LBO. In the data, we find firms are less likely to privatize if they have a high market beta, residual variance, or cash flow volatility.

Keywords: buyout waves, time-varying risk premium

JEL Classification: G11, G32, G34

Suggested Citation

Haddad, Valentin and Loualiche, Erik and Plosser, Matthew C., Buyout Activity and Asset Prices (May 16, 2011). Available at SSRN: https://ssrn.com/abstract=1843804 or http://dx.doi.org/10.2139/ssrn.1843804

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Erik Loualiche (Contact Author)

University of Minnesota, Finance ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States
612 625 5679 (Phone)

HOME PAGE: http://https://loualiche.gitlab.io/www/

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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