Do Firms Have Leverage Targets? Evidence from Acquisitions

Journal of Financial Economics, Forthcoming

38 Pages Posted: 15 Mar 2006 Last revised: 28 May 2009

See all articles by Jarrad Harford

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Sandy Klasa

University of Arizona - Department of Finance

Nathan Walcott

Washington State University

Date Written: May 1, 2008


In the context of large acquisitions, we provide evidence on whether firms have target capital structures. We examine how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions. We show that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to finance the acquisition with equity. Also, we find a positive association between the merger-induced changes in target and actual leverage and document that bidders incorporate more than two-thirds of the change to the merged firm's new target leverage. Following debt-financed acquisitions, managers actively move the firm back to its target leverage, reversing more than 75% of the acquisition's leverage effect within 5 years. Overall, our results are consistent with a model of capital structure that includes a target level and adjustment costs.

Keywords: Capital structure, target leverage, mergers, acquisitions

JEL Classification: G31, G32, G34

Suggested Citation

Harford, Jarrad and Klasa, Sandy and Walcott, Nathan Garett, Do Firms Have Leverage Targets? Evidence from Acquisitions (May 1, 2008). Journal of Financial Economics, Forthcoming, Available at SSRN:

Jarrad Harford (Contact Author)

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Sandy Klasa

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

Nathan Garett Walcott

Washington State University ( email )

Todd 470
Pullman, WA 99164-4746
United States
509-335-0118 (Phone)


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