Private Equity Waves

Han Smit () and Ward A. van den Berg ()
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Han Smit: Erasmus Universiteit Rotterdam
Ward A. van den Berg: Erasmus Universiteit Rotterdam

No 06-053/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This study presents a dynamic model for the private equity market in which information revelation and uncertainty rationally explain the cyclical pattern of investment flows into private equity. The net benefit of private equity over public equity is i) uncertain and ii) agents have private information about the benefits of their investment. When these distinguishing characteristics determine investment behavior in private equity markets, rational investment waves may arise endogenously. Investment behavior reveals private information on the benefits of private equity financing and may trigger a cascade when investors jump on the bandwagon and invest irrespective of their private information content. We argue that the procyclical behavior of private equity volumes is strengthened by the revelation of information on the benefits of private equity investments. The occurrence and length of such waves in the market for private equity depend on the capabilities of agents.

Keywords: private equity; information economics (search for similar items in EconPapers)
JEL-codes: G24 G34 (search for similar items in EconPapers)
Date: 2006-06-09
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20060053

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