A Rational Incentives-Based Explanation for Booms and Busts: The Case of Roll-Ups

41 Pages Posted: 25 Mar 2003

Date Written: September 19, 2005

Abstract

We explore how the misaligned incentives of underwriters and investors can contribute to boom-and-bust cycles in capital market transactions. Underwriters, whose rewards are transaction-driven and largely front-loaded, have incentives to complete deals to generate fees. Investors, who base their estimates of return in part on information about past deal performance, have incentives to invest in deals with high expected returns. If the performance of deals changes over time, investors' reliance on information from past deals means they may under- or over-commit capital relative to what hindsight indicates would have been optimal. We examine this explanation using roll-ups from the 1990s.

Keywords: Booms and busts, incentives, roll-ups

JEL Classification: G30, G14, G24

Suggested Citation

Bethel, Jennifer and Krigman, Laurie, A Rational Incentives-Based Explanation for Booms and Busts: The Case of Roll-Ups (September 19, 2005). Available at SSRN: https://ssrn.com/abstract=369520 or http://dx.doi.org/10.2139/ssrn.369520

Jennifer Bethel (Contact Author)

Babson College ( email )

Babson Park, MA 02457-0310
United States
781-239-5797 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/bethel/

Laurie Krigman

Babson College ( email )

Finance Division
321 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4246 (Phone)

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