New Economics Papers
on Financial Markets
Issue of 2007‒07‒20
four papers chosen by

  1. Do Private Equity Investors Take Firms Private for Different Reasons? By Fidrmuc, J.P.; Roosenboom, P.; Dijk, D.J.C. van
  2. The Fundamentals of Commodity Futures Returns By Gary B. Gorton; Fumio Hayashi; K. Geert Rouwenhorst
  3. Risk Based Explanations of the Equity Premium By John Donaldson; Rajnish Mehra
  4. The Equity Premium Puzzle: Australia and the United States in Comparative Perspective By Ville, Simon

  1. By: Fidrmuc, J.P.; Roosenboom, P.; Dijk, D.J.C. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: In recent years, the going private market experienced a considerable boom in size and also became more interesting for private equity investors. This paper shows that the higher involvement of private equity investors affects the going private market as these investors approach firms with different characteristics relative to the traditional management buy-outs. Our results on a sample of 212 UK going private transactions completed in the period 1997-2003 suggest that private equity backed deals differ from management sponsored deals without any backing of private equity investors in four ways. First, even though both types of deals suffer from market undervaluation, the mis-pricing is larger for management sponsored deals. Second, it is only management sponsored deals that suffer low financial visibility as their stock?s analyst coverage and frequency of trading are low. Third, Jensen?s free cash flow hypothesis seems not to apply to private equity backed deals as they have shortage of cash, low debt levels, and pay high dividends. Finally, the two types of deals differ in ownership structure. Private equity backed deals seem to have higher ownership by financial institutions and their ownership is less concentrated.
    Keywords: Going Private Transactions;Corporate Governance;Private Equity;
    Date: 2007–05–10
  2. By: Gary B. Gorton; Fumio Hayashi; K. Geert Rouwenhorst
    Abstract: Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.
    JEL: G1 G11 G12
    Date: 2007–07
  3. By: John Donaldson; Rajnish Mehra
    Abstract: This essay reviews the family of models that seek to provide aggregate risk based explanations for the empirically observed equity premium. Theories based on non-expected utility preference structures, limited financial market participation, model uncertainty and the small probability of enormous losses are detailed. We impose the additional requirements that candidate models yield consistent inter temporal portfolio choice and that a representative agent can be constructed which is independent of the underlying heterogeneous economy's initial wealth distribution. While many models are able to replicate a wide variety of financial statistics including the premium, few satisfy these latter criteria as well.
    JEL: D10 D11 D50 D52 D90 D91 E30 G00 G11 G12
    Date: 2007–07
  4. By: Ville, Simon (University of Wollongong)
    Abstract: The equity risk premium puzzle has received regular attention by economists since it was first invoked by Mehra and Prescott (1985) twenty years ago. In a recent paper, they revisit the question and reject many of the explanations offered but we are left with no clear alternative account. The current paper seeks to do two things. We provide matching historical evidence of the equity premium for Australia and compare the results for the two nations. Resulting from this, we argue that a closer understanding of phases of economic history helps to explain the puzzle.
    JEL: G12 N2
    Date: 2006

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.