Buyout Activity: The Impact of Aggregate Discount Rates

Valentin Haddad, Erik Loualiche, Matthew Plosser

Research output: Contribution to journalArticle

4 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)371-414
Number of pages44
JournalJournal of Finance
Volume72
Issue number1
DOIs
StatePublished - Feb 1 2017

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