Buyout Activity: The Impact of Aggregate Discount Rates

77 Pages Posted: 27 Mar 2013 Last revised: 26 Nov 2014

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: March 1, 2013

Abstract

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

Haddad, Valentin and Loualiche, Erik and Plosser, Matthew C., Buyout Activity: The Impact of Aggregate Discount Rates (March 1, 2013). FRB of New York Staff Report No. 606. Available at SSRN: https://ssrn.com/abstract=2239178 or http://dx.doi.org/10.2139/ssrn.2239178

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

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 (Contact Author)

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

33 Liberty Street
New York, NY 10045
United States

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