Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/93589 
Year of Publication: 
2013
Series/Report no.: 
Staff Report No. 606
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
We argue that buyout waves form in response to fluctuations in aggregate discount rates. In our model, discount rates alter the present value of cash flow improvements and the illiquidity premium demanded by buyout investors. We confirm our predictions empirically. Overall deal activity varies positively with the risk premium and negatively with the risk-free rate, exhibiting heterogeneous effects across firms. Cross-sectionally, firms with high levels of systematic risk or idiosyncratic risk are less likely targets. We decompose variation in activity structurally between changes in the value of cash flow and the illiquidity premium. The positive correlation of the two explains the wave behavior of activity.
Subjects: 
buyouts
discount rates
illiquidity
governance
JEL: 
G11
G23
G34
Document Type: 
Working Paper

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