Liquidity Mergers

Abstract:     
We model the interplay between corporate liquidity and asset reallocation opportunities. Our model implies that financially distressed firms might be acquired by other firms in the same industry even when there are no operational synergies associated with the acquisition. We call such transactions "liquidity mergers,'' since their main purpose is to reallocate liquidity from firms that have liquidity to those that might be inefficiently terminated due to a liquidity shortfall. We provide a detailed analysis of firms' optimal liquidity policies as a function of future real asset reallocation in their industries. We find that lines of credit are a particularly attractive way of financing liquidity-driven acquisitions. The model makes predictions that have not been examined in the literature, some of which we explore in the paper. Using a sample of 2,355 takeovers between 1980 and 2006, we find evidence that liquidity-driven acquisitions are more prevalent when industry-level asset specificity is high (industry-specific rents are high), but firm-level asset specificity is low (other industry firms can efficiently operate the assets of distressed firms). Using a sample of 9,710 lines of credit between 1987 and 2008, we find novel evidence on the relation between and asset specificity and the use of credit lines.

Keywords: Mergers and Acquisitions, Credit Lines, Loan Commitments, Liquidity, Cash, Financial Distress

JEL Classifications: G31

Working Paper Series