Untapped Equity as Dry Powder for Acquisitions

67 Pages Posted: 14 Oct 2017 Last revised: 9 Jun 2020

Date Written: June 8, 2020


Capital market frictions likely impact firms investments, yet empirical identification is difficult as they often arise from endogenous firm choices. In this paper, I exploit a legally-imposed friction to estimate the effects of equity financing constraints on investments. Using a novel identification strategy, I find that firms with greater equity financing flexibility are more likely to make an acquisition, generate higher announcement returns, and decrease the likelihood of being targeted. However, when firms exhibit poor monitoring, flexibility leads to lower announcement returns, demonstrating the costs of greater flexibility. Overall, the results highlight the role and trade-offs of equity financing flexibility.

Keywords: Financing Flexibility, Mergers, Acquisitions, Authorized Shares

JEL Classification: G32, G34, G31

Suggested Citation

Haslag, Peter H., Untapped Equity as Dry Powder for Acquisitions (June 8, 2020). Vanderbilt Owen Graduate School of Management Research Paper No. 3052780, Available at SSRN: https://ssrn.com/abstract=3052780 or http://dx.doi.org/10.2139/ssrn.3052780

Peter H. Haslag (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

HOME PAGE: http://https://www.sites.google.com/site/peterhaslag/

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