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Journal of Financial and Quantitative Analysis Vol. 58 No. 5 2023

M&A Activity and the Capital Structure of Target Firms

Mark J. Flannery1; Jan Hanousek2,3; Anastasiya Shamshur4; Jiri Tresl

1 University of Florida · 2 Center for Economic Research and Graduate Education – Economics Institute · 3 Charles University · 4 King's College London

open access

Abstract

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.

DOI
10.1017/s0022109022000436
Volume
58
Issue
5
Pages
2064-2095
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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