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

57 Pages Posted: 3 Oct 2019 Last revised: 21 Jun 2022

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: April 13, 2021

Abstract

Increases in government debt are associated with a reduction in the yield spread between high-grade corporate bonds and long-term Treasuries and an increase in fiscal uncertainty. Consequently, increases in government debt significantly reduce the acquisition likelihood for firms. The effect is stronger among firms whose debt is a closer substitute for Treasuries and firms with greater exposure to fiscal uncertainty. A positive change in government debt motivates acquirers to avoid cash financing or more irreversible deals. The average deal quality is lower during periods of rising public debt, consistent with heightened fiscal uncertainty impeding monitoring and fostering “bad” deals.

Keywords: mergers and acquisitions, acquisition likelihood, national debt, substitutability of corporate debt, tax policy uncertainty.

JEL Classification: D80, 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 (April 13, 2021). 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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