Working Paper: NBER ID: w19378
Authors: Marc Martos-Vila; Matthew Rhodes-Kropf; Jarrad Harford
Abstract: This paper introduces the impact of debt misvaluation on merger and acquisition activity. Debt misvaluation helps explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). The effects of overvalued debt might seem limited since both acquirer types and target firms can access the debt markets. However, fundamental differences in governance and project co-insurance between the two types of acquirer interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.
Keywords: mergers and acquisitions; debt misvaluation; financial buyers; strategic buyers
JEL Codes: G24; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| governance differences (H11) | varying impacts on acquisition decisions (D91) |
| debt misvaluation (G32) | coinsurance effect (G52) |
| debt misvaluation (G32) | monitoring effect (E71) |
| debt misvaluation (G32) | willingness to pay for targets by financial buyers (G34) |
| overvaluation (F31) | ability to leverage debt for acquisitions by financial buyers (G32) |
| debt misvaluation (G32) | competitive landscape between buyer types (D26) |
| debt misvaluation (G32) | merger and acquisition activity (G34) |
| debt misvaluation (G32) | dominance of financial acquirers over strategic ones (G34) |
| debt overvaluation (G32) | increased private equity activity relative to strategic buyers (G34) |