M&A Activity and the Capital Structure of Target Firms

Jan Hanousek, Mark Flannery and Anastasiya Shamshur

No 14911, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite rapidly – within a year of the acquisition. The typical over-levered firm adjusts its debt-to-assets ratio from 34.4% in the year before acquisition to 20% in the year after. (The adjustment is smaller, but still quite rapid, for targets that had been under-leveraged.) These adjustments occur primarily through debt issuances or retirements. We also investigate whether target firms’ pre-merger leverage contributes to the probability of them being acquired. We find that firms further away from their optimal leverage are more likely to be acquired: for an average firm, an increase in the absolute leverage deviation from 1% to 10% of total assets increases the probability of being acquired by 4.1% to 5.6% (The larger effect applies to over-leveraged firms.) Overall, our results provide support for the trade-off theory of capital structure and suggest that financial synergies have a significant role in the typical European acquisition decision.

Keywords: M&a; Target capital structure; Leverage deficit (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-cfn
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Journal Article: M&A Activity and the Capital Structure of Target Firms (2023)
Working Paper: M&A Activity and the Capital Structure of Target Firms (2020)
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