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Do Firms Have Leverage Targets? Evidence from Acquisitions

Jarrad Harford

University of Washington

Sandy Klasa

University of Arizona - Department of Finance

Nathan Walcott

Washington State University

May 1, 2008

Journal of Financial Economics, Forthcoming

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.

Number of Pages in PDF File: 38

Keywords: Capital structure, target leverage, mergers, acquisitions

JEL Classification: G31, G32, G34

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Date posted: March 15, 2006 ; Last revised: May 28, 2009

Suggested Citation

Harford, Jarrad and Klasa, Sandy and Walcott, Nathan, Do Firms Have Leverage Targets? Evidence from Acquisitions (May 1, 2008). Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=890849

Contact Information

Jarrad Harford (Contact Author)
University of Washington ( email )
Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)
HOME PAGE: http://faculty.washington.edu/jarrad/
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)
HOME PAGE: http://www.cb.wsu.edu/~nwalcott
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