Debt and Corporate Performance: Evidence from Unsuccessful Takeovers

36 Pages Posted: 17 Jul 2000 Last revised: 6 Oct 2010

See all articles by Assem Safieddine

Assem Safieddine

American University of Beirut - Olayan School of Business

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 1997

Abstract

This paper examines how debt affects firms following failed takeovers. Using a sample of 573 unsuccessful takeovers, we find that, on average, targets significantly increase their debt levels. Targets that increase their debt levels more than the median amount reduce their levels of capital expenditures, sell off assets, reduce employment, increase focus and increase their operating cash flows. These leverage-increasing targets also realize superior stock price performance over the five years following the failed takeover. In contrast, those firms that increase their leverage the least show insignificant changes in their level of investment and their operating cash flows and realize stock price performance that is no different than their benchmarks. Those failed targets that increase their leverage the least, and fail to get taken over in the future, realize significant negative stock returns following their initial failed takeovers. The evidence is consistent with the hypothesis that debt helps firms remain independent not because it entrenches managers, but because it commits the manager to making the improvements that would be made by potential raiders.

Suggested Citation

Safieddine, Assem M. and Titman, Sheridan, Debt and Corporate Performance: Evidence from Unsuccessful Takeovers (June 1997). NBER Working Paper No. w6068. Available at SSRN: https://ssrn.com/abstract=226478

Assem M. Safieddine (Contact Author)

American University of Beirut - Olayan School of Business ( email )

Bliss Street
Beirut 1107 2020
Lebanon
961 1 374374 (Phone)

HOME PAGE: http://sb.aub.edu.lb/faculty/nbk.asp

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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