Do Acquisitions Relieve Target Firms' Financial Constraints?

Isil Erel, Yeejin Jang and Michael Weisbach

No 18840, NBER Working Papers from National Bureau of Economic Research, Inc

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. These findings are consistent with the view that acquisitions ease financial frictions in target firms.

JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-bec and nep-cfn
Note: CF
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Citations: View citations in EconPapers (3)

Published as Isil Erel & Yeejin Jang & Michael S. Weisbach, 2015. "Do Acquisitions Relieve Target Firms’ Financial Constraints?," Journal of Finance, American Finance Association, vol. 70(1), pages 289-328, 02.

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Journal Article: Do Acquisitions Relieve Target Firms’ Financial Constraints? (2015)
Working Paper: Do Acquisitions Relieve Target Firms' Financial Constraints? (2013)
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