Leverage changes and growth options in mergers and acquisitions

Elettra Agliardi, Amir Amel-Zadeh and Nicos Koussis

Journal of Empirical Finance, 2016, vol. 37, issue C, 37-58

Abstract: We develop and empirically test a trade-off model for the analysis of leverage changes in mergers and acquisitions. Our study extends prior findings of a post-merger increase in leverage for the acquiring firm, by linking this leverage increase to merging firms that are less correlated, create significantly larger growth options, and have lower bankruptcy costs and lower volatility. Specifically, we show that acquiring firms are more likely to finance diversifying acquisitions with debt as equity holders exploit the increased debt capacity with higher leverage resulting in total merger gains that are positively associated with financial synergies. We also provide evidence of a U-shaped relationship between growth options and leverage changes theoretically and empirically in the context of mergers.

Keywords: Capital structure; Mergers and acquisitions; Growth options; Dynamic trade-off model (search for similar items in EconPapers)
JEL-codes: G13 G32 G34 L25 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:37:y:2016:i:c:p:37-58

DOI: 10.1016/j.jempfin.2016.02.004

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