Deviation from the Target Capital Structure and Acquisition Choices
49 Pages Posted: 19 Mar 2006 Last revised: 20 Nov 2010
Date Written: November 17, 2010
This study finds that managers take deviations from their target capital structures into account when planning and structuring acquisitions. Specifically, firms that are overleveraged relative to their target debt ratios are less likely to make acquisitions and are less likely to use cash in their offers. Furthermore, they acquire smaller targets and pay lower premiums. Managers of overleveraged firms also actively rebalance their capital structures when they anticipate a high likelihood of making an acquisition. Finally, they pursue the most value-enhancing acquisitions. Collectively, these findings improve our understanding on how firms choose their capital structures and shed light on the interdependence of capital structure and investment decisions in the presence of financial frictions.
Keywords: Mergers and acquisitions, target capital structure, anticipation, financing frictions
JEL Classification: G32, G34
Suggested Citation: Suggested Citation