The Burden of the National Debt: Evidence from Mergers and Acquisitions

44 Pages Posted: 3 Oct 2019 Last revised: 18 May 2020

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Yanhui Wu

Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN)

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance

Date Written: May 15, 2020

Abstract

We examine the impact of changes in national debt on the mergers and acquisitions (M&As) activity. Although increases in government debt reduces the acquisition likelihood, we find no evidence for the traditional interest rate mechanism. Instead, we document that upsurges in national debt depress M&A activity through increases in fiscal policy related uncertainty (taxes, discretionary spending, entitlement programs etc.). During periods of increasing national debt, acquirers decrease stock-based financing relative to cash-based financing and reduce the acquisition of targets with a higher degree of investment irreversibility. In such periods, announced deals are associated with lower premiums and lower synergistic gains.

Keywords: Mergers and acquisitions, National debt, Fiscal policy, Uncertainty

JEL Classification: E22, E62, G18, G34, G38

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui and Zhang, Huizhong, The Burden of the National Debt: Evidence from Mergers and Acquisitions (May 15, 2020). Available at SSRN: https://ssrn.com/abstract=3458690 or http://dx.doi.org/10.2139/ssrn.3458690

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

Yanhui Wu (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

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