Working Paper: NBER ID: w22414
Authors: 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.
Keywords: buyouts; risk premium; corporate finance
JEL Codes: G11; G23; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate risk premium (G52) | buyout activity (G34) |
| decrease in aggregate risk premium (G19) | increase in buyout activity (G34) |
| credit market conditions (E44) | buyout activity (G34) |
| aggregate risk premium (G52) | characteristics of buyout targets (G34) |
| high risk premium environments (G22) | muted performance gains from buyouts (G34) |
| muted performance gains from buyouts (G34) | influence on buyout decisions (G34) |