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M&A Activity and the Capital Structure of Target Firms

Published online by Cambridge University Press:  29 April 2022

Mark J. Flannery Open the ORCID record for Mark J. Flannery [Opens in a new window] ,
Jan Hanousek Open the ORCID record for Jan Hanousek [Opens in a new window] ,
Anastasiya Shamshur Open the ORCID record for Anastasiya Shamshur [Opens in a new window]  and
Jiri Tresl Open the ORCID record for Jiri Tresl [Opens in a new window]
Mark J. Flannery*
Affiliation:
University of Florida Warrington School of Business
Jan Hanousek
Affiliation:
Charles University and the Academy of Sciences CERGE-EI, Mendel University, and CEPR [email protected]
Anastasiya Shamshur
Affiliation:
King’s College London King’s Business School and Charles University and the Academy of Sciences CERGE-EI [email protected]
Jiri Tresl
Affiliation:
University of Mannheim Business School and Charles University and the Academy of Sciences CERGE-EI [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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We study 6,083 European firms that were acquired between 1999 and 2015. Soon after the acquisition, the acquired firms promptly and substantially close the gap between their actual leverage ratios and their target (optimal) ratios. Firms that were over- (under-) leveraged at the start of their acquisition year move their debt-to-assets ratio from 34.1% to 20% (10% to 18.5%) by the end of the following year. Under-leveraged firms expand their assets rapidly following acquisition, as they gain improved access to investable resources. Our results are consistent with the trade-off theory of capital structure and with the existence of firm-specific target leverage ratios.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 5 , August 2023 , pp. 2064 - 2095
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Demian Berchtold, Ernst Maug, Alexandra Niessen-Ruenzi, Andrea Patacconi, Stefan Ruenzi, and seminar and conference participants at the University of Mannheim, University of Bath, Tsinghua PBC School of Finance, King’s College London, 2020 Southern Finance Association, and 2019 Midwest Finance Association for helpful comments and suggestions. Hanousek gratefully acknowledges support under GAČR grant No. 21-30822S.

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