Strategic Underleveraging and Acquisitions

65 Pages Posted: 28 Sep 2021

See all articles by Magnus Blomkvist

Magnus Blomkvist

EDHEC Business School

Karl Felixson

Swedish School of Economics and Business Administration

Anders Löflund

Hanken School of Economics

Hitesh Vyas

Audencia Business School

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

Blomkvist, Magnus and Felixson, Karl and Löflund, Anders and Vyas, Hitesh, Strategic Underleveraging and Acquisitions (September 24, 2021). Available at SSRN: https://ssrn.com/abstract=3929870 or http://dx.doi.org/10.2139/ssrn.3929870

Magnus Blomkvist (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Karl Felixson

Swedish School of Economics and Business Administration ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland

Anders Löflund

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

Hitesh Vyas

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

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