Financial Leverage Changes Associated with Corporate Mergers

Posted: 11 Nov 2001

Abstract

The financial motivation theory on mergers hypothesizes that mergers can create value by increasing debt capacity. Consistent with the increased debt capacity hypothesis, our results show that the average financial leverage (debtdivided by debt plus equity) increases significantly from 32.1% one year before mergers to 38.4% one year after mergers. In a direct test of the hypothesis, cross- sectional regression analysis shows that the change in financial leverage is significantly positively correlated with announcement period abnormal returns. The analysis controls for other tax and operating performance related benefits. We conclude that the stock market incorporates benefits from anticipated financial leverage increases at the time of the merger announcement.

JEL Classification: D46

Suggested Citation

Ghosh, Al (Aloke) and Jain, Prem C., Financial Leverage Changes Associated with Corporate Mergers. Available at SSRN: https://ssrn.com/abstract=271374

Al (Aloke) Ghosh (Contact Author)

UNC Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

HOME PAGE: http://www.alokeghosh.com

Prem C. Jain

Georgetown University ( email )

McDonough School of Business
Georgetown Univeristy
Washington, DC 20057
United States
202-697-9455 (Phone)

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