Debt Financing and Balance-Sheet Collateral: Evidence from Fair-Value Adjustments
56 Pages Posted: 8 Sep 2017 Last revised: 14 Jan 2020
Date Written: January 2020
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: Suggested Citation