Leverage changes and growth options in mergers and acquisitions |
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| Institution: | 1. Department of Economics, University of Bologna, Piazza Scaravilli, 2, Bologna 40126, Italy;2. Rimini Centre for Economic Analysis, Rimini, Italy;3. Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, UK;4. Department of Finance, Accounting and Economics, Frederick University, Mariou Agathagelou 18, Limassol, Cyprus;1. Department of Finance and Real Estate, College of Business, Colorado State University, Fort Collins, CO 80523, United States;2. Department of Finance, College of Business and Innovation, University of Toledo, Toledo, OH 43606, United States;1. Department of Economics, University of Kiel, Olshausenstr. 40, 24118 Kiel, Germany;2. Banco de España Chair in Computational Economics,University Jaume I, Campus del Riu Sec, 12071 Castellon, Spain;1. University of Padua, Italy;2. World Bank Group, United States;3. King''s College London, United Kingdom;4. SEAM University of Messina, Italy;1. Regions Bank, Birmingham, AL, USA;2. Department of Economics, Finance and Legal Studies, Culverhouse College of Commerce & Business Administration, University of Alabama, Tuscaloosa, AL, USA;1. Hong Kong Polytechnic University, Hong Kong, China;2. Hong Kong University of Science and Technology, Hong Kong, China;1. University of Technology, Sydney, Finance Discipline Group, UTS Business School, P.O. Box 123, Broadway, NSW 2007, Australia;2. University of New South Wales, School of Banking and Finance, UNSW Business School, Sydney, NSW 2052, Australia |
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| Abstract: | We develop and empirically test a trade-off model for the analysis of leverage changes in mergers and acquisitions. Our study extends prior findings of a post-merger increase in leverage for the acquiring firm, by linking this leverage increase to merging firms that are less correlated, create significantly larger growth options, and have lower bankruptcy costs and lower volatility. Specifically, we show that acquiring firms are more likely to finance diversifying acquisitions with debt as equity holders exploit the increased debt capacity with higher leverage resulting in total merger gains that are positively associated with financial synergies. We also provide evidence of a U-shaped relationship between growth options and leverage changes theoretically and empirically in the context of mergers. |
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