Borrow Cheap,Buy High? The Determinants of Leverage and Pricing in Buyouts

Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories. Using a large, international sample of buyouts from 1980 to 2008, we find that buyout leverage is unrelated to the cross‐sectional factors, suggested by traditional capital structure theories, that drive public firm leverage. Instead, variation in economy‐wide credit conditions is the main determinant of leverage in buyouts. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.     

Report of the Managing Editor

Overall, 2002 was a good year for the Journal. Importantly, submissions have recovered from their unusually low level recorded in 2001 and by the end of the year the quality of the printing and production systems had improved considerably. One further aspect of the Society's modernisation, the on‐line availability of the JAE, was established in July and initial indications on its usage are very encouraging, with over 1600 ‘hits’recorded in the first six months of operation. Average editorial response time has fallen to 4.6 months, only a little way short of our 4‐month target for submission turnaround. On the basis of current (2001) data collated by the Institute of Scientific Information, the JAE ranks 1^st, 2^nd, and 1^st in terms of its three citations criteria among the eight journals in the Agricultural Economics and Policy Category. In terms of impact factor, it is 60^th out of 165 economics journals.     

Cities,market integration,and going to sea: stunting and the standard of living in early nineteenth‐century England and Wales1

A new source, 1840s Admiralty seamen's tickets, is used to explore three anthropometric issues. First, did being born in a city, with its associated disamenities, lead to stunting? Second, did being born near a city, whose markets sucked away foodstuffs, lead to stunting? Third, did child labour lead to stunting? We find that only those born in very large cities suffered a level of stunting that contemporaries could have observed. Being born near a city, which gave parents opportunities to trade away family calories, and perhaps increased exposure to disease, did not cause stunting. Britain was a well‐integrated market; all families, whatever their locations, had options to trade and faced similar disease environments. Finally, although adults who had gone to sea young were shorter than those who did not enlist until fully grown, going to sea did not stunt. Instead, plentiful food at sea attracted stunted adolescents, who reversed most of their stunting as a result. But child labour at sea was different from other forms of children's work because wages were largely hypothecated to the child as food and shelter onboard. In contrast, where wages were paid to the child or his parents in cash, they became submerged in the household economy and their benefits were shared with other family members.     

Common Stochastic Trends in a System of Exchange Rates

Univariate tests reveal strong evidence for the presence of a unit root in the univariate time-series representation for seven daily spot and forward exchange rate series. Furthermore, all seven spot and forward rates appear to be cointegrated; that is, the forward premiums are stationary, and one common unit root, or stochastic trend, is detectable in the multivariate time-series models for the seven spot and forward rates, respectively. This is consistent with the hypothesis that the seven exchange rates possess one long-run relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates.     

REFORM OF THE DEPOSIT INSURANCE SYSTEM: AN APPRAISAL OF THE FHLBB AND FDIC STUDIES

This paper presents an appraisal of the studies of the deposit insurance system submitted to Congress by the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board in compliance with the Garn-St. German legislation of 1982. The purpose of these studies was to assess the current structure of the deposit insurance system in light of the changes in the regulation of depository institutions mandated in recent legislation
Many observers of the financial system believe that, as a result of recent regulatory changes, the deposit insurance agencies do not have sufficient power to control risk-taking of insured institutions. These two reports present an assessment of mechanism which could be used to limit the risk of the deposit insurance agencies
The emphasis in both reports is on ways in which the amount of market discipline applied to insured institutions could be increased. Both reports identify essentially three ways in which this might be accomplished. First, risk-adjusted deposit insurance prices might be employed. Second, the volume of uninsured creditors might be increased, either through changes in limits of insurance coverage or through imposition of requirements for use of subordinated debt. Third, the current public deposit insurance system might be partially supplanted by one that is private. This paper evaluates the merits of each of these proposals and compares the positions taken by the FHLBB and the FDIC on the issues     

Unemployment Insurance under Moral Hazard and Limited Commitment: Public versus Private Provision

This paper analyzes a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady‐state properties of the optimum private unemployment insurance scheme are established. The interaction between public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one‐to‐one and that for other parameter values a mix of both public and private insurance can be welfare maximizing.     

Report of the Managing Editor

2004 has been a good year for the Journal and the last under the Nottingham editorial team. The target of a four‐month average turnaround for submissions has been achieved for the second year in succession and record use has been made of the on‐line version of the JAE ‐which currently attracts around 165 full‐text paper downloads per month. The release of the 2003 citations data from the Institute of Scientific Information shows that JAE articles are cited more than ever before, although the change in the JAE's publication dates implemented in 2002 have inadvertently reduced its ‘impact factor’ score, which has slipped from 1^st to 7^th since 2001. Reversion to the original publication cycle will correct this apparent decline. On the other two measures JAE is ranked 2^nd and 3^rd in the Agricultural Economics and Policy category. Preparations are on‐going to ensure a smooth hand‐over of Editorship in April 2005, when Professor David Harvey and colleagues from the University of Newcastle upon Tyne take over the JAE. The handover will coincide with the adoption of an electronic submission and review system and a partnership with Blackwell Publishing.     

Long-Term Market Overreaction: The Effect of Low-Priced Stocks

Conrad and Kaul (1993) report that most of De Bondt and Thaler's (1985) long-term overreaction findings can be attributed to a combination of bid-ask effects when monthly cumulative average returns (CARs) are used, and price, rather than prior returns. In direct tests, we find little difference in test-period returns whether CARs or buy-and-hold returns are used, and that price has little predictive ability in cross-sectional regressions. The difference in findings between this study and Conrad and Kaul's is primarily due to their statistical methodology. They confound cross-sectional patterns and aggregate time-series mean reversion, and introduce a survivor bias. Their procedures increase the influence of price at the expense of prior returns.