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Liquidity Mergers

66 Pages Posted: 18 Mar 2009 Last revised: 14 Feb 2012

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 16, 2011

Abstract

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.

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

JEL Classification: G31

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: https://ssrn.com/abstract=1362327 or http://dx.doi.org/10.2139/ssrn.1362327

Heitor Almeida (Contact Author)

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
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HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

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Murillo Campello

Cornell University ( email )

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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/

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