The dynamics of leverage of newly controlled target firms: evidence after an acquisition

Hubert Bruslerie () and Luminita Enache ()
Additional contact information
Hubert Bruslerie: Paris Dauphine-PSL University
Luminita Enache: University of Calgary, Haskayne School of Business

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 2, No 1, 445 pages

Abstract: Abstract The paper provides insights into how debt overhang issues related to transfers of value to creditors can impact target firms’ financial policy after an acquisition. The later are natural events which introduce new prospects of value creation and possibilities of undue transfer of value to the incumbent creditors. We examine changes in leverage at the target firm before and after it is acquired in a sample of US, Canadian, and European firms over the 2000–2016 period. We find that the target’s pre-acquisition financial leverage predicts changes in its leverage after the acquisition, consistent with target firms increasing their leverage after the acquisition to avoid wealth transfer to creditors. Changes in financing structure are implemented shortly after the acquisition. The more long-term indebted the target firm, the more releveraging develops. Our results support the releveraging hypothesis as suggested by the creditors’ holdup mechanism.

Keywords: Creditors’ holdup; Private benefits; Debt leverage; Releveraging; Controlling shareholders; M&A (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11156-023-01166-z Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:61:y:2023:i:2:d:10.1007_s11156-023-01166-z

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-023-01166-z

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().