Deviation from the Target Capital Structure and Acquisition Choices

48 Pages Posted: 16 Oct 2010 Last revised: 31 Aug 2011

Multiple version iconThere are 2 versions of this paper

Date Written: October 14, 2010


This study finds that managers take deviations from their target capital structures into account when planning and structuring acquisitions. Specifically, firms that are overleveraged relative to their target debt ratios are less likely to make acquisitions and are less likely to use cash in their offers. Furthermore, they acquire smaller targets and pay lower premiums. Managers of overleveraged firms also actively rebalance their capital structures when they anticipate a high likelihood of making an acquisition. Finally, they pursue the most value-enhancing acquisitions. Collectively, these findings improve our understanding on how firms choose their capital structures and shed light on the interdependence of capital structure and investment decisions in the presence of financial frictions.

Keywords: Target Capital Structure, M&A

JEL Classification: G32, G34

Suggested Citation

Uysal, Vahap B., Deviation from the Target Capital Structure and Acquisition Choices (October 14, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN:

Vahap B. Uysal (Contact Author)

University of Oklahoma ( email )

307 West Brooks
Norman, OK 73019-4004
United States
405-325 5672 (Phone)

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