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

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