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Liquidity Mergers

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Murillo Campello

Cornell University; National Bureau of Economic Research (NBER)

Dirk Hackbarth

Boston University Questrom School of Business

January 16, 2011

Journal of Financial Economics (JFE), Forthcoming
AFA 2010 Atlanta Meetings Paper

We model the interplay between corporate liquidity and asset reallocation opportunities. Our model implies that financially distressed firms may be acquired by liquid firms in their industries even when there are no operational synergies associated with the merger. We call these transactions "liquidity mergers," since their main purpose is to reallocate liquidity to firms that might be otherwise inefficiently terminated. We show that liquidity mergers are more likely to occur when industry-level asset specificity is high (i.e., industry-specific rents are high) and firm-level asset specificity is low (industry counterparts can efficiently operate the distressed firms' assets). We also provide a detailed analysis of firms' optimal liquidity policies as a function of real asset reallocation. We show that firms are more likely to use credit lines relative to cash if they anticipate liquidity-merger activity in their industry. The model makes a number of predictions that have not been examined in the literature. Using a large sample of mergers, we verify the model's prediction that liquidity-driven acquisitions are more likely to occur in industries with specific, but transferable assets. Using alternative data sources for credit lines, we also confirm the model's prediction that firms are more likely to use credit lines (relative to cash) when they operate in industries in which liquidity mergers are more frequent.

Number of Pages in PDF File: 66

Keywords: Mergers and acquisitions, credit lines, cash, asset specificity, financial distress

JEL Classification: G31

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Date posted: March 18, 2009 ; Last revised: February 14, 2012

Suggested Citation

Almeida, Heitor and Campello, Murillo and Hackbarth, Dirk, Liquidity Mergers (January 16, 2011). Journal of Financial Economics (JFE), Forthcoming; AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1362327 or http://dx.doi.org/10.2139/ssrn.1362327

Contact Information

Heitor Almeida (Contact Author)
University of Illinois at Urbana-Champaign ( email )
515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)
HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Murillo Campello
Cornell University ( email )
114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States
HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
Dirk Hackbarth
Boston University Questrom School of Business ( email )
Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)
HOME PAGE: http://people.bu.edu/dhackbar/
Feedback to SSRN

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