Buyout Activity: The Impact of Aggregate Discount Rates
77 Pages Posted: 27 Mar 2013 Last revised: 26 Nov 2014
Date Written: March 1, 2013
We argue that buyout waves form in response to fluctuations in aggregate discount rates. In our model, discount rates alter the present value of cash flow improvements and the illiquidity premium demanded by buyout investors. We confirm our predictions empirically. Overall deal activity varies positively with the risk premium and negatively with the risk-free rate, exhibiting heterogeneous effects across firms. Cross-sectionally, firms with high levels of systematic risk or idiosyncratic risk are less likely targets. We decompose variation in activity structurally between changes in the value of cash flow and the illiquidity premium. The positive correlation of the two explains the wave behavior of activity.
Keywords: buyouts, governance, discount rates, illiquidity
JEL Classification: G11, G23, G34
Suggested Citation: Suggested Citation