Buyout activity: the impact of aggregate discount rates

Valentin Haddad, Erik Loualiche and Matthew Plosser

No 606, Staff Reports from Federal Reserve Bank of New York

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.

Keywords: buyouts; discount rates; illiquidity; governance (search for similar items in EconPapers)
JEL-codes: G11 G23 G34 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Buyout Activity: The Impact of Aggregate Discount Rates (2017)
Working Paper: Buyout Activity: The Impact of Aggregate Discount Rates (2016)
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