Strategic Underleveraging and Acquisitions
65 Pages Posted: 28 Sep 2021
Date Written: September 24, 2021
Abstract
This paper investigates the Morellec and Zhdanov (2008) prediction that firms strategically underleverage to win takeover contests. In line with the MZ commitment hypothesis, we find that greater pre-bid leverage reduction is linked to greater acquisition activity. We document support for three specific MZ model predictions: pre-merger underleveraging increases with (i) bidding competition, (ii) synergies offered by targets and (iii) transaction size. Our analysis rules out several explanations linked to financial flexibility as explanations for the results. We therefore find consistent evidence that strategic underleveraging conditional on the acquisition outlook is an important determinant of capital structure dynamics.
Keywords: Mergers and Acquisitions, Security Offerings, Capital Structure, Optimal Capital Structure. Trade-off Theory
JEL Classification: G30, G32, G34
Suggested Citation: Suggested Citation