Easing the Squeeze: How Do Acquisitions Relieve Target Firms’ Financial Constraints?
38 Pages Posted: 14 Sep 2024 Last revised: 23 Oct 2024
Abstract
Using private firm financial data, we investigate how acquisitions alleviate financial constraints in private firms. We find that targets’ internal financing improves after acquisitions because they can retain higher proportions of earnings and borrow interest-free capital from their parent companies. Targets also receive better external financing as they obtain more debt financing with lower interest rates, borrow more trade credit from suppliers, and collect receivables from customers more quickly. Our findings suggest that improvements in both internal and external financing contribute to the reduction in targets’ financial constraints.
Keywords: Financial constraints, Mergers and acquisitions, Payout policy, Intra-group borrowing, Debt financing
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