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Financial leverage changes associated with corporate mergers |
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| Authors: | Aloke Ghosh Prem C Jain |
| Institution: | a Zicklin School of Business, Baruch College (CUNY), Box E-725, 17 Lexington Avenue, New York, NY 10010, USA;b Goizueta Business School, Emory University, 1300 Clifton Road, Atlanta, GA 30322, USA;c AB Freeman School of Business, Tulane University, New Orleans, LA 70118, USA;d McDonough School of Business, Georgetown University, Washington DC 20057, USA |
| Abstract: | We empirically examine whether firms increase financial leverage following mergers. Firms could increase financial leverage either because of an increase in debt capacity or because of unused debt capacity from pre-merger years. We find that financial leverage of combined firms increases significantly following mergers. A cross-sectional analysis shows that the change in financial leverage around mergers is significantly positively correlated with the announcement period market-adjusted returns. Further tests indicate that the increase in financial leverage is an outcome of an increase in debt capacity, although there is weak evidence that some of the increase in financial leverage is a result of past unused debt capacity. |
| Keywords: | Mergers Financial leverage Debt capacity |
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