NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Buyout Activity: The Impact of Aggregate Discount Rates

Valentin Haddad, Erik Loualiche, Matthew Plosser

NBER Working Paper No. 22414
Issued in July 2016
NBER Program(s):AP, CF

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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Document Object Identifier (DOI): 10.3386/w22414

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