This paper investigates the Morellec and Zhdanov (2008) (MZ) prediction that firms strategically underleverage to win takeover contests. We document support for several specific MZ model predictions: pre-bid underleveraging increases with bidding competition, synergies offered by targets, investment type, industry concentration, and with firms actively adjusting their capital structure in advance of bidding. An empirically verified financial frictions explanation does not fully account for these patterns. Taken together, we find consistent evidence that strategic underleveraging conditional on the acquisition outlook is an important determinant of capital structure dynamics.

We propose a rationale for why firms often return to the equity market shortly after their initial public offering (IPO). We argue that hard to value firms conduct smaller IPOs, and that they return to the equity market conditional on a positive valuation signal. This is driven by two-way learning, as market information complements both corporate disclosure and internal information available to management. In contrast to prior studies, we find that information asymmetry is not a necessary condition for staged financing. Our arguments receive support in a sample of 3625 U.S. IPOs between 1980 and 2018.

This paper provides evidence of a flight home effect in the syndicated loan market during the COVID-19 pandemic, where lenders rebalance their loan portfolios towards domestic borrowers. Specifically, a one standard deviation increase in COVID exposure in the lenders’ home country is associated with a 4.1 percentage point decrease in lenders’ share of foreign loans. This home bias eases with the intensity of government restrictions during the pandemic and strengthens with expansionary monetary policy. We further pinpoint an operative supply-side mechanism, where smaller, less capitalized banks with a higher proportion of non-performing loans are more likely to rebalance towards domestic borrowers. Although different forms of asymmetric information exert a material – yet not uniform – effect on the lenders’ rebalancing decisions, the flight home effect emerges independently of the existence of these information asymmetries.

A large body of research documents an increased acquisition activity among credit rated firms. We examine whether firms seek an initial credit rating to conduct large scale acquisitions, and whether this acquisition activity is driven by empire building or value creation motives. First, we find that acquisitions are a credible motive for seeking a credit rating, initially rated firms are associated with 13.05pp greater acquisition likelihood and these transactions are more likely to be settled by cash. Second, to recoup the costs of becoming rated, firms conduct large-scale high-quality acquisitions associated with 1.52pp higher acquirer announcement returns, where the higher cumulative abnormal returns are concentrated among firms obtaining a speculative grade initial rating. Third, following the initial rating year, acquisition activity dampens to pre-rating levels. In sum our findings lend support to the notion that previously financial constrained firms enter the bond markets to complement bank financing when conducting large value enhancing acquisitions.