Working Paper: NBER ID: w17867
Authors: Isil Erel; Yeejin Jang; Michael S. Weisbach
Abstract: Managers often claim that an important source of value in acquisitions is the acquiring firm's ability to finance investments for the target firm. This claim implies that targets are financially constrained prior to being acquired and that these constraints are eased following the acquisition. We evaluate the extent to which acquisitions lower financial constraints on a sample of 5,187 European acquisitions occurring between 2001 and 2008. Each of these targets remains a subsidiary of its new parent, so we can observe the target's financial policies following the acquisition. We examine whether these post-acquisition financial policies reflect improved access to capital. We find that the level of cash target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline significantly, while investment significantly increases following the acquisition. These effects are stronger in deals more likely associated with financing improvements. These findings are consistent with the view that easing financial frictions is a source of value that motivates acquisitions.
Keywords: acquisitions; financial constraints; investment
JEL Codes: G3; G32; G34; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial constraints (H60) | cash holdings normalized by assets (G19) |
| acquisitions (G34) | cash holdings normalized by assets (G19) |
| acquisitions (G34) | cash flow sensitivity (G32) |
| acquisitions (G34) | investment sensitivity to cash flow (G31) |
| acquisitions (G34) | investment as a fraction of total assets (G31) |