Working Paper: NBER ID: w18840
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 these predictions on a sample of 5,187 European acquisitions occurring between 2001 and 2008, for which we can observe the target's financial policies both before and after the acquisition. We examine whether target firms' 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 that are more likely to be associated with financing improvements. These findings are consistent with the view that acquisitions ease financial frictions in target firms.
Keywords: Acquisitions; Financial Constraints; Investment Policies
JEL Codes: G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Independent firms (L19) | Greater initial financial constraint compared to subsidiaries (G32) |
| Acquisitions (G34) | Decline in cash holdings of target firms (G34) |
| Acquisitions (G34) | Easing of financial constraints (G59) |
| Easing of financial constraints (G59) | Decline in sensitivity of cash to cash flow (D25) |
| Easing of financial constraints (G59) | Decline in sensitivity of investment to cash flow (G31) |
| Acquisitions (G34) | Increase in investment as a fraction of total assets (G31) |