Debt Financing and Balance-Sheet Collateral: Evidence from Fair-Value Adjustments

56 Pages Posted: 8 Sep 2017 Last revised: 14 Jan 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: January 2020

Abstract

Using a novel hand-collected dataset of business combination disclosures, we investigate whether fair-value adjustments (FVAs) of a target’s assets allow the acquiring firm to enhance its borrowing activities. FVAs are the difference between the fair value of the target’s net assets and their book value at the acquisition date. We find that the average corporate acquirer reports economically significant FVAs on assets other than goodwill, reflecting an increase of 60 percent in the value of the target’s total assets. We document that FVAs are associated with substantial new debt issuance by the acquiring firm during the three-year period after the transaction. FVAs are also associated with the issuance of cheaper, secured, and longer-term debt, which is also more likely to have balance sheet covenants. Our findings are driven by FVAs reported on the target’s tangible assets, which indicates that the shift from historical cost to fair value measurement around business combinations provides new information about the firm’s collateralizable asset base that is relevant to lenders.

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., Debt Financing and Balance-Sheet Collateral: Evidence from Fair-Value Adjustments (January 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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