Tapping into Financial Synergies: Alleviating Financial Constraints Through Acquisitions

62 Pages Posted: 13 Aug 2018 Last revised: 21 Feb 2019

See all articles by Rohan Williamson

Rohan Williamson

Georgetown University - McDonough School of Business

Jie Yang

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: 2018-08-03

Abstract

The paper examines whether financially constrained firms are able to use acquisitions to ease their constraints. The results show that acquisitions do ease financing constraints for constrained acquirers. Relative to unconstrained acquires, financially constrained firms are more likely to use undervalued equity to fund acquisitions and to target unconstrained and more liquid firms. Using a propensity score matched sample in a difference-in-difference framework, the results show that constrained acquirers become less constrained post-acquisition and relative to matched non-acquiring firms. This improvement is more pronounced for diversifying acquisitions and constrained firms that acquire rather than issue equity and retain the proceeds. Following acquisition, constrained acquirers raise more debt and increase investments, consistent with experiencing reductions in financing constraints relative to matched non-acquirers. These improvements are not seen for unconstrained acquirers. Finally, the familiar diversification discount is non- existent for financially constrained acquirers.

Keywords: Diversification, Financing constraints, Firm structure, Mergers & acquisitions

JEL Classification: G30, G32, G34, L25

Suggested Citation

Williamson, Rohan G. and Yang, Jie, Tapping into Financial Synergies: Alleviating Financial Constraints Through Acquisitions (2018-08-03). FEDS Working Paper No. 2018-053. Available at SSRN: https://ssrn.com/abstract=3229489 or http://dx.doi.org/10.17016/FEDS.2018.053

Rohan G. Williamson (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-2284 (Phone)
202-687-4031 (Fax)

Jie Yang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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