How Do Firms Value Debt Capacity? Evidence from Mergers and Acquisitions

56 Pages Posted: 15 Nov 2018

See all articles by James S. Ang

James S. Ang

Florida State University; Florida State University - College of Law

Mai Daher

American University of Beirut; London School of Economics & Political Science (LSE); Imperial College London

Ahmad Ismail

American University of Beirut

Date Written: October 22, 2018

Abstract

We examine how capital structure considerations affect acquisition pricing and valuation. We find that debt capacity improvement is value-enhancing for all acquirers when they gradually reveal their growth opportunities to the market. This is reflected in the long-run stock market returns, both 12- and 24-months after acquisition announcement. While both overlevered and underlevered acquirers benefit from an increase in debt capacity resulting from the merger, only overlevered acquirers pay higher premiums to increase debt capacity. Underlevered acquirers do not pay a premium for it; instead they consider market timing opportunities. Results are robust for alternative definitions of leverage and debt capacity improvement.

Keywords: acquisitions; optimal leverage; market timing; premium, debt capacity

JEL Classification: G34

Suggested Citation

Ang, James S. and Daher, Mai and Ismail, Ahmad, How Do Firms Value Debt Capacity? Evidence from Mergers and Acquisitions (October 22, 2018). Available at SSRN: https://ssrn.com/abstract=3276028 or http://dx.doi.org/10.2139/ssrn.3276028

James S. Ang (Contact Author)

Florida State University ( email )

College of Business
Tallahassee, FL 32306-1042
United States
904-644-8208 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

Mai Daher

American University of Beirut ( email )

Beirut, 0236
Lebanon

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Ahmad Ismail

American University of Beirut ( email )

Bliss Street
Olayan School of Business
Beirut, POB 11236
Lebanon

HOME PAGE: http://www.aub.edu.lb/osb/publicprofile/Pages/profile.aspx?memberID=ai05

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