Download this Paper Open PDF in Browser

Financing-Motivated Acquisitions

Charles A. Dice Center Working Paper No. 2012-6

Fisher College of Business Working Paper No. 2012-03-006

47 Pages Posted: 18 Feb 2012 Last revised: 6 May 2013

Isil Erel

Ohio State University (OSU) - Department of Finance

Yeejin Jang

Purdue University - Krannert School of Management

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 16, 2012

Abstract

Managers often claim that an important source of value in acquisitions is the acquiring firm’s ability to finance investments for the target firm. This claim implies that targets are financially constrained prior to being acquired and that these constraints are eased following the acquisition. We evaluate the extent to which acquisitions lower financial constraints on a sample of 5,187 European acquisitions occurring between 2001 and 2008. Each of these targets remains a subsidiary of its new parent, so we can observe the target’s financial policies following the acquisition. We examine whether these post-acquisition financial policies reflect improved access to capital. We find that the level of cash target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline significantly, while investment significantly increases following the acquisition. These effects are stronger in deals more likely associated with financing improvements. These findings are consistent with the view that easing financial frictions is a source of value that motivates acquisitions.

Keywords: Financial Constraints, Acquisitions, Financial Frictions

JEL Classification: G32, G34, L2

Suggested Citation

Erel, Isil and Jang, Yeejin and Weisbach, Michael S., Financing-Motivated Acquisitions (February 16, 2012). Charles A. Dice Center Working Paper No. 2012-6; Fisher College of Business Working Paper No. 2012-03-006. Available at SSRN: https://ssrn.com/abstract=2006469 or http://dx.doi.org/10.2139/ssrn.2006469

Isil Erel

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Yeejin Jang

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

HOME PAGE: http://www.yeejinjang.com

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
256
Rank
93,801
Abstract Views
2,313