Capital structure in the context of M&A

: target leverage and the post-acquisition speed of adjustment

Abstract

Mergers and acquisitions (M&As) often significantly alter a company's capital structure, leading to changes in the optimal leverage ratio for each firm. Previous research has shown that firms generally have leverage targets and attempt to return to their optimal capital structure following an acquisition. However, there is still debate over the speed at which this adjustment occurs. This paper aims to examine the impact of both the acquiring and target firms on the post-acquisition speed of adjustment (SOA) toward the optimal leverage ratio. The study calculates the target leverage for a sample of majority acquisitions in the US between 1994 and 2014 and divides the sample into four subsamples based on the leverage deviation of the acquiring and target firms. The results show that the SOA varies among the subsamples, with faster adjustment for overleveraged acquirers and slower adjustment for underleveraged acquirers. The study also finds that the SOA is higher for overleveraged firms acquiring underleveraged target firms and lower for underleveraged firms acquiring underleveraged targets. The findings suggest that underleveraged firms that are acquired by overleveraged firms may benefit from improved access to capital markets, while underleveraged firms acquired by underleveraged firms may not experience a substantial decrease in the cost of debt and therefore have a lower SOA. Overall, the results indicate that firms manage their capital structure differently depending on their own and their target's leverage deviation and highlight the importance of considering both firms in capital structure analysis in the context of mergers and acquisitions.

Date of Award	25 Jan 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)