Asset Volatility and Capital Structure: Evidence from Corporate Mergers
55 Pages Posted: 22 Feb 2014 Last revised: 18 Jun 2018
Date Written: June 12, 2018
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: Suggested Citation