Does Forecasted Operating Synergy Explain Merger-Induced Capital Structure?

62 Pages Posted: 24 May 2018

See all articles by Ahmad Ismail

Ahmad Ismail

American University of Beirut

Date Written: May 24, 2018


We estimate operating synergies from a unique hand-collected dataset on management’s forecasts of merger incremental cash flows. We find that forecasted synergies induce acquirers to make leverage-increasing acquisitions. Institutional investors and bidders’ credit rating enhance that relation and certify synergy forecasts. We find that forecasted synergies also enhance post-merger debt capacity. Synergies encourage acquirers to make acquisitions leading to larger overleverage too. Conversely, overpaying acquirers engage in leverage-reducing acquisitions. The larger the forecasted synergies, the more positive the market response to the announcement of leverage-increasing and over-levered deals, supporting the view that such bidders will have better payment ability and may put the leverage into good use in the future. Results support dynamic trade-off theory indicating that firms proactively alter their leverage towards a value-maximizing target. Results are confirmed using Propensity Score Matching technique.

Keywords: operating synergy, acquisitions, leverage deficit, debt capacity, payment ability

JEL Classification: G34

Suggested Citation

Ismail, Ahmad, Does Forecasted Operating Synergy Explain Merger-Induced Capital Structure? (May 24, 2018). Available at SSRN: or

Ahmad Ismail (Contact Author)

American University of Beirut ( email )

Bliss Street
Olayan School of Business
Beirut, POB 11236


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