Strategic underleveraging and acquisitions

Magnus Blomkvist, Karl Felixson, Anders Löflund and Hitesh Vyas

Journal of Corporate Finance, 2022, vol. 76, issue C

Abstract: This paper investigates the Morellec and Zhdanov (2008) (MZ) prediction that firms strategically underleverage to win takeover contests. We document support for several specific MZ model predictions: pre-bid underleveraging increases with bidding competition, synergies offered by targets, investment type, industry concentration, and with firms actively adjusting their capital structure in advance of bidding. An empirically verified financial frictions explanation does not fully account for these patterns. Taken together, we find consistent evidence that strategic underleveraging conditional on the acquisition outlook is an important determinant of capital structure dynamics.

Keywords: Capital structure; Mergers and acquisitions; Industrial competition; Bidding competition; Strategic capital structure; Financial flexibility (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:76:y:2022:i:c:s0929119922001262

DOI: 10.1016/j.jcorpfin.2022.102283

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