Acquisition Decisions of Zero-Leverage Firms

Abstract

We provide evidence on whether zero-leverage firms make unique acquisition decisions in line with their unique leverage policies. We show that zero-leverage firms are more likely to acquire targets with low or zero leverage than they are to acquire other targets in order to maintain zero leverage and that they are more likely to use cash than equity in their offers. Although managers of zero-leverage firms have high levels of discretion, they are not likely to pursue value-destroying acquisitions. Overall, these findings shed light on the interlinked capital structure and investment decisions of zero-leverage firms.

Keywords: Zero leverage; mergers and acquisitions; target capital structure; method of payment; acquirer returns

JEL Classification: G30, G31, G34