Deviation from the Target Capital Structure and Acquisition Choices
48 Pages Posted: 16 Oct 2010 Last revised: 31 Aug 2011
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: Suggested Citation