Impact of leverage on stock price reactions to M&A announcements

Abstract

There are several studies about the impact of different variables on cumulative abnormal returns around mergers and acquisitions (M&A) announcements. However, there is a gap in the literature concerning the effect of both acquirer and target leverage on stock price reactions. With a final main sample of 974 deals in the US between 2000 and 2023, this dissertation studies the impact of both acquirers' and targets’ capital structure decisions on the short-term stock price reaction of both acquirers and targets around the announcement date of the transaction. It was found that, on average, a highly leveraged company acquiring a lowly leveraged firm was significantly associated with a positive stock price reaction for acquirers. In the baseline model without controls, it was discovered that the previous relationship also holds for targets and that, on average, a highly leveraged acquirer purchasing a lowly leveraged target was significantly associated with negative cumulative abnormal returns for targets. These findings were subject to further analysis for different event windows, expansion and recession periods, and election and non-election years. The results obtained from these robustness tests are consistent with those derived from the main regressions.

Date of Award	6 Feb 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)