Do Acquisitions Relieve Target Firms' Financial Constraints?

Isil Erel, Yeejin Jang and Michael Weisbach
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Isil Erel: OH State University
Yeejin Jang: OH State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Managers often claim that an important source of value in acquisitions is the acquiring firm's ability to finance investments for the target firm. This claim implies that targets are financially constrained prior to being acquired and that these constraints are eased following the acquisition. We evaluate these predictions on a sample of 5,187 European acquisitions occurring between 2001 and 2008, for which we can observe the target's financial policies both before and after the acquisition. We examine whether target firms' post-acquisition financial policies reflect improved access to capital. We find that the level of cash target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline significantly, while investment significantly increases following the acquisition. These effects are stronger in deals that are more likely to be associated with financing improvements. While the evidence does not speak to whether easing of financial frictions is a pervasive motive for acquisitions, it is consistent with the view that acquisitions ease financial frictions in target firms, especially when the target firm is relatively small.

JEL-codes: G32 G34 L20 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-bec and nep-cfn
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Do Acquisitions Relieve Target Firms’ Financial Constraints? (2015)
Working Paper: Do Acquisitions Relieve Target Firms' Financial Constraints? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2013-03

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