Buyout Activity: the Impact of Aggregate Discount Rates
(with Valentin Haddad and Matthew Plosser)

Revised August 2016

Journal of Finance, February 2017, 72:1

	

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.



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Our post in Fortune
Our post on the Liberty Street Economics Blog of the New York Fed
Our post on the Harvard Law School Forum on Corporate Governance and Financial Regulation


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