Financing-Motivated Acquisitions

47 Pages Posted: 24 Feb 2012

See all articles by Isil Erel

Isil Erel

Ohio State University (OSU) - Department of Finance

Yeejin Jang

UNSW Australia Business School, School of Banking and Finance

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: February 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.

Suggested Citation

Erel, Isil and Jang, Yeejin and Weisbach, Michael S., Financing-Motivated Acquisitions (February 2012). NBER Working Paper No. w17867. Available at SSRN: https://ssrn.com/abstract=2010399

Isil Erel (Contact Author)

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

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Yeejin Jang

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Michael S. Weisbach

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

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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