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Buyout Activity: The Impact of Aggregate Discount Rates

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  • Valentin Haddad
  • Erik Loualiche
  • Matthew Plosser

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

  • Valentin Haddad & Erik Loualiche & Matthew Plosser, 2016. "Buyout Activity: The Impact of Aggregate Discount Rates," NBER Working Papers 22414, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22414
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    3. Antonio Salvi & Emanuele Teti & Anastasia Giakoumelou, 2021. "The Relationship between LBOs, IPOs and Market Risk Premium: An Empirical Analysis of the European Market," International Journal of Business and Management, Canadian Center of Science and Education, vol. 14(7), pages 160-160, July.
    4. Phalippou, Ludovic & Rauch, Christian & Umber, Marc, 2018. "Private equity portfolio company fees," Journal of Financial Economics, Elsevier, vol. 129(3), pages 559-585.
    5. Arpit Gupta & Stijn Van Nieuwerburgh, 2019. "Valuing Private Equity Strip by Strip," NBER Working Papers 26514, National Bureau of Economic Research, Inc.
    6. Chiarella, Carlo & Ostinelli, Diego, 2020. "Financial or strategic buyers: Who is at the gate?," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 393-407.
    7. Seung Kwak & Charles Press, 2023. "Pre-LBO Credit Market Conditions and Post-LBO Target Behavior," Finance and Economics Discussion Series 2023-077, Board of Governors of the Federal Reserve System (U.S.).
    8. Arpit Gupta & Stijn Van Nieuwerburgh, 2021. "Valuing Private Equity Investments Strip by Strip," Journal of Finance, American Finance Association, vol. 76(6), pages 3255-3307, December.
    9. Sirio Aramonte & Fernando Avalos, 2021. "The rise of private markets," BIS Quarterly Review, Bank for International Settlements, December.
    10. Bustamante, Maria Cecilia & Zucchi, Francesca, 2023. "Innovation, industry equilibrium, and discount rates," Working Paper Series 2835, European Central Bank.
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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