Charles A. Dice Center Working Paper No. 2012-6
47 Pages Posted: 18 Feb 2012 Last revised: 6 May 2013
Date Written: February 16, 2012
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: 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