42 Pages Posted: 22 Jan 2013
Date Written: January 14, 2013
This paper shows an empirical evidence that the level of financial constraints for target and acquiring firms in an M&A deal has a significant impact on wealth gains by the acquiring firm in long-term. If both target and acquiring firms are financially unconstrained, thus have low financing costs, investors believe that the level of M&A synergy for them is low in long-term since they do not have a high level of incentives to pool resources to reduce financing cost. On the other hand, long-term gain for acquiring firms’ shareholders is positive and significantly higher than for the other deals if both target and acquiring firms are financially constrained, since they can reduce financing costs by pooling their resources. This positive average long-term abnormal return for the constrained pairs of acquirer and target can be partially explained by industry diversification, impact of institutional ownership, and the level of corporate governance for the acquirer.
Keywords: mergers and acquisitions, long-term performance, financial constraints
JEL Classification: G30, G34
Suggested Citation: Suggested Citation