Capital Structure Gain from Mergers - Formulation and Estimation
Posted: 25 Aug 1998
This study focuses on financial (as distinct from operating or managerial) effects of mergers. It presents a formal expression for a capital-structure gain from mergers when there exist both corporate and personal taxes as well as bankruptcy costs. To test the hypothesis that financial effects are more important for unrelated (than for related) businesses, we estimate the capital structure gain for two types of mergers: pure conglomerate (PC) mergers and non-conglomerate (NC) vertical and horizontal mergers. The empirical findings suggest that the financial dollar gain for PC mergers is as much as twice higher than the financial gain for NC mergers. The results also indicate that the mean financial gain comprises about one-half of the mean total gain from PC mergers. These findings seem consistent with the existence of financial effects of mergers reported in the literature.
JEL Classification: G34
Suggested Citation: Suggested Citation