The Role of Fair-Value Adjustments in Debt Financing

61 Pages Posted: 8 Sep 2017 Last revised: 19 Oct 2020

See all articles by Aleksander Aleszczyk

Aleksander Aleszczyk

New York University (NYU) - Leonard N. Stern School of Business; London Business School

Emmanuel T. De George

University of Miami

Aytekin Ertan

London Business School

Florin P. Vasvari

London Business School

Date Written: September 2020

Abstract

Using a novel hand-collected dataset of business combination disclosures, we investigate whether and how fair-value adjustments (FVAs) arising from mergers and acquisitions facilitate debt financing. FVAs are the difference between the fair value and the book value of the target’s net assets. We document that the average corporate acquirer reports economically significant FVAs on non-goodwill assets, showing an increase of 60 percent in the value of the target’s total assets. We find that these FVAs reflect synergies between the target and the acquirer as well as unrecorded economic value on the target’s assets that was not previously captured by historical cost accounting. We then document that FVAs on tangible assets are associated with substantial new debt issuance by the acquiring firm during the three-year period after the transaction. They are also associated with the issuance of cheaper, secured and longer-term debt and with debt that is more likely to have balance sheet covenants. Our findings indicate that FVAs capture new and relevant information about collateralizable assets that is contractible in debt agreements.

Keywords: fair value adjustments, debt contracting, debt financing, mergers and acquisitions, collateral

JEL Classification: M41, G32, G34, G12

Suggested Citation

Aleszczyk, Aleksander and De George, Emmanuel T. and Ertan, Aytekin and Vasvari, Florin P., The Role of Fair-Value Adjustments in Debt Financing (September 2020). Available at SSRN: https://ssrn.com/abstract=3032580 or http://dx.doi.org/10.2139/ssrn.3032580

Aleksander Aleszczyk

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Emmanuel T. De George

University of Miami ( email )

Coral Gables, FL 33146-6531
United States
305-284-2273 (Phone)

Aytekin Ertan

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
442070008131 (Phone)

Florin P. Vasvari (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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