Buyout Activity: The Impact of Aggregate Discount Rates

51 Pages Posted: 18 Jul 2016

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: July 2016

Abstract

Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit-specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the risk premium in corporate finance decisions.

Suggested Citation

Haddad, Valentin and Loualiche, Erik and Plosser, Matthew C., Buyout Activity: The Impact of Aggregate Discount Rates (July 2016). NBER Working Paper No. w22414, Available at SSRN: https://ssrn.com/abstract=2810924

Valentin Haddad (Contact Author)

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

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

33 Liberty Street
New York, NY 10045
United States

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