Sizable Premium Research Articles

Pricing and value creation in private equity-backed buy-and-build strategies

We investigate the pricing and value creation in private equity-backed buy-and-build (B&B) strategies using a sample of 3399 buyouts between 1997 and 2020 as well as proprietary performance data. We find that private equity firms pay sizable premiums for B&B platforms. The transaction multiples are similar to those paid by strategic acquirers for matched targets. Despite paying high premiums, private equity firms generate above-average equity returns in B&B strategies. This is because of both higher top-line growth and multiple expansion. To back up our empirical results and shed light on decision-making in B&B strategies, we present evidence from the field. Survey results from 32 interviews with private equity managers provide novel insights into B&B rationale, valuation practices, pricing, value creation, acquisition processes and execution.

Long-term reversals in the corporate bond market

Long-term reversals in corporate bonds are economically and statistically significant in a comprehensive sample spanning the period 1977 to 2017. Such reversals are stronger for bonds with high credit risk and more binding regulatory, capital, and funding liquidity constraints. Bond long-term reversal is not a manifestation of the equity counterpart and is mainly driven by long-term losers. A long-term reversal factor carries a sizable premium and is not explained by long-established equity and bond market factors. Thus, past returns capture investors’ ex-ante risk assessment and the degree of institutional constraints they face, so losing bonds command higher expected returns.

Arbitrage-Free Affine Models of the Forward Price of Foreign Currency

Forward foreign exchange contracts embed not only expected depreciation but also a sizable premium, which complicates inferences about anticipated returns. This study derives arbitrage-free affine forward currency models (AFCMs) with closed-form expressions for both unobservable variables. Model calibration to forward term structures of eleven U.S.-dollar currency pairs from the mid-to-late 1990s through early 2014 fits the data closely and suggests that the premium is indeed nonzero and variable, but not to the degree implied by previous econometric studies.

Downside Consumption Risk and Expected Returns

The expected utility model captures the attitude toward risk exclusively through the marginal utility. Recognizing this limitation several models explicitly account for aversion to downside risk. This paper presents non-experimental evidence that this feature is empirically relevant in asset pricing.I use rank-dependent expected utility to model aversion to downside risk and derive Euler equations for consumption and asset returns. The resulting model nests the standard CCAPM and allows estimation of preferences parameters by GMM and the tests of significance of the downside risk aversion. I estimate the model using Fama and French 25 portfolios and find that it performs considerably better than the standard CCAPM. The parameter estimates imply that the left tail outcomes are over-weighted while the right tail outcomes are under-weighted. Asset prices reflect a sizable premium for downside risk and the corresponding parameter is strongly significant. The downside risk premium exhibits significant variation across the test portfolios and contributes to value and size premia.

The Civilian Earnings Experience of Vietnam - Era Veterans

In this paper we examine the civilian earnings experience of Vietnam-era veterans and nonveterans between 1968 and 1977. Contrary to the results of other studies indicating sizable premiums for veterans of earlier wars but significant penalties for Vietnam veterans, we find only small overall differences between the earnings of Vietnam-era veterans and similar nonveterans. However, the absorption of veterans into the civilian labor market was slow, particularly during the early seventies. More detailed analysis shows that Vietnam-era veterans exhibited longitudinal earnings profiles which were initially lower but steeper than those of nonveterans, that veterans' relative earnings improved toward the end of this period, and that younger birth cohorts may have fared more poorly than older cohorts. Only those with less than a high school education consistently realized veteran premiums. We find no evidence that military service has benefited recent cohorts of nonwhite veterans.

The Effect of the Social Security Act on the Life Insurance Needs of Labor

M j t UCH has been written recently concerning the effect of the Social Security Act on various phases of our complicated social and economic life. However, little has been said about the changes that the Act will make in the life needs of labor. The purpose of this article is to discuss the effects due directly to the Act in its benefit and tax provisions rather than any arising indirectly from an increase in general taxation. It will first be necessary to describe the present protection of the gainfully employed group that will be covered by the old-age portions of the Act (Titles II and VIII). This is obtained chiefly from three different sources: industrial, group, and fraternal insurance. The first two are offered by companies, while the third may be obtained from various fraternal and beneficial societies. Ordinary is usually not available to this group because of the necessity of paying sizable premiums for the minimum amount of available ($i,ooo) and because agents selling this type usually do not bother going after such small amounts of business as may result. Industrial is popularly referred to as nickel-a-week insurance since premiums are collected weekly and are five cents or multiples thereof. It was first offered in the United States in i875 and has had a rapid and steady development since then, as may be seen in Table i. The in force has more than doubled every ten years until now there is more than eighteen billion dollars in force. The amount of per unit of premium (five cents) varies with the original age of the insured, whereas in ordinary life the amount of is fixed and the premium is variable. Another distinction between industrial and ordinary is in the collection of premiums. In general, under the former the agent collects the premium each week at the home of the insured, while under the latter the premium is paid directly to the company. The primary purpose of industrial is to provide for burial, and it is for this reason