Asset Volatility and Capital Structure: Evidence from Corporate Mergers

55 Pages Posted: 22 Feb 2014 Last revised: 18 Jun 2018

Oliver Levine

University of Wisconsin - Madison

Youchang Wu

University of Oregon - Lundquist College of Business

Date Written: June 12, 2018

Abstract

We exploit the cross-sectional variation in asset volatility and leverage changes around mergers to estimate the effect of firm risk on capital structure. We find that firms respond strongly to the diversifying effect of mergers, partially through the choice of payment method. Our estimates imply that 20\% of the post-merger increase in market leverage and 29\% of the decrease in cash are due to reduced firm risk. Our findings provide direct evidence for the coinsurance effect of mergers on debt capacity. They also suggest that firm risk is a first-order determinant of leverage, consistent with the trade-off theory of capital structure.

Keywords: Capital structure, Mergers and acquisitions, Cash holding, Financial synergy

JEL Classification: G30, G32, G34

Suggested Citation

Levine, Oliver and Wu, Youchang, Asset Volatility and Capital Structure: Evidence from Corporate Mergers (June 12, 2018). Available at SSRN: https://ssrn.com/abstract=2399154 or http://dx.doi.org/10.2139/ssrn.2399154

Oliver Levine (Contact Author)

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States

Youchang Wu

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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