Post-Merger Integration Duration and Leverage Dynamics of Mergers: Theory and Evidence
58 Pages Posted: 18 Mar 2012 Last revised: 1 Jun 2012
Date Written: March 15, 2012
This paper studies the effect of the post-merger integration duration on acquiring ﬁrms’ leverage behavior around mergers, using a dynamic model in which full merger beneﬁts cannot be consumed at the time of a merger, but rather after a pre-speciﬁed post-merger transition period that is associated with various integration costs. The model generates new implications pertaining to acquiring ﬁrms’ leverage dynamics in the immediate pre-and post-merger periods along with the method of payment choice. Speciﬁcally, the model indicates that acquiring firm managers who expect a longer integration duration choose a lower leverage ratio for the newly-merged firms and are more likely to finance such deals with equity. Also, firms tend to remain lower leveraged throughout the post-merger transition period when the remaining integration period is expected to be lengthy. Using 200 mergers between 1995 and 2007 in which we are able to create the post-merger integration duration variable, we provide strong empirical support for these model implications. Overall, our analysis offers new insight to understanding capital structure dynamics around mergers and provides an alternative explanation for the method of payment choice.
Keywords: leverage, post-merger integration duration, merger transition, method of payment
JEL Classification: G32, G34
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