Leverage Changes and Growth Options in Mergers and Acquisitions

51 Pages Posted: 27 Jul 2012 Last revised: 1 Apr 2015

See all articles by Elettra Agliardi

Elettra Agliardi

University of Bologna - Department of Economics

Amir Amel-Zadeh

University of Oxford - Said Business School

Nicos Koussis

Frederick University

Date Written: March 30, 2015

Abstract

We develop and empirically test a trade-off model for the analysis of leverage changes in mergers and acquisitions. This study extends prior findings of a post-merger increase in leverage for the acquiring firm by linking this leverage increase to merging firms that are less correlated, create significantly larger growth options, have lower bankruptcy costs and lower volatility. Specifically, we show that acquiring firms are more likely to finance diversifying acquisitions with debt as equity holders exploit the increased debt capacity with higher leverage resulting in total merger gains that are positively associated with financial synergies. This study further corroborates recent theoretical evidence of a U-shaped relationship between growth options and leverage theoretically and empirically in the context of mergers.

Keywords: Capital Structure, Mergers and Acquisitions, Growth Options, Trade-off Model

JEL Classification: G13, G32, G34, L25

Suggested Citation

Agliardi, Elettra and Amel-Zadeh, Amir and Koussis, Nicos, Leverage Changes and Growth Options in Mergers and Acquisitions (March 30, 2015). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2116335 or http://dx.doi.org/10.2139/ssrn.2116335

Elettra Agliardi (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

Amir Amel-Zadeh

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Nicos Koussis

Frederick University ( email )

7, Y. Frederickou Str.
Pallouriotisa
Nicosia, 1036
Cyprus

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