Working Paper: CEPR ID: DP14911
Authors: Mark Flannery; Jan Hanousek; Anastasiya Shamshur; Jiri Tresl
Abstract: Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite rapidly – within a year of the acquisition. The typical over-levered firm adjusts its debt-to-assets ratio from 34.4% in the year before acquisition to 20% in the year after. (The adjustment is smaller, but still quite rapid, for targets that had been under-leveraged.) These adjustments occur primarily through debt issuances or retirements. We also investigate whether target firms’ pre-merger leverage contributes to the probability of them being acquired. We find that firms further away from their optimal leverage are more likely to be acquired: for an average firm, an increase in the absolute leverage deviation from 1% to 10% of total assets increases the probability of being acquired by 4.1% to 5.6% (The larger effect applies to over-leveraged firms.) Overall, our results provide support for the trade-off theory of capital structure and suggest that financial synergies have a significant role in the typical European acquisition decision.
Keywords: MA; target; capital structure; leverage; deficit
JEL Codes: G30; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| acquisition (G34) | leverage adjustment (F32) |
| acquired firms (G34) | rapid leverage adjustment (F32) |
| leverage deviations (G32) | probability of being acquired (G34) |
| overleveraged firms (G32) | debt-to-assets ratio adjustment (G32) |
| leverage deviation from optimal levels (G40) | acquisition probability increase (C70) |