Effect of leverage deviation on choices and outcomes of public versus non‐public acquisitions

Abstract

This paper examines whether firms' deviation from target leverage may predict types and outcomes of mergers and acquisitions (M&A) deals. We find that over‐levered firms are more inclined to be involved in public acquisitions than non‐public acquisitions. Consistent with the proposition of information economics theory, our findings suggest that information asymmetry is the main motive behind over‐levered firms' preference for public targets. Specifically, we observe that over‐levered acquirers not only prefer public targets, but also pick those with less information asymmetry. We find that, in the short term, the market reacts negatively to the announcement of public acquisitions by over‐levered firms. However, in the long term these acquirers experience better operating synergies and values, measured by changes in return on assets and Tobin's q, respectively. Our results are robust after controlling for M&A deals‐, firm‐, industry‐characteristics and endogeneity concerns using both propensity score matching and Heckman two stage methods. Overall, our findings support the premises of agency theory and Uysal, Journal of Financial Economics (2011), 102, 602–620 view that over‐levered firms have a high tendency to pursue most value‐enhancing acquisition deals due to the high pressure of holding high levels of debt.

On the likelihood and type of merger and acquisition in the US listed companies: the role of females on the board

“…For the other control variables, consistent with Ahmed and Elshandidy (2021) and Uysal (2011), Table 3 finds that firm size positively affects the likelihood of making acquisitions. Conversely, firms with high leverage ratios are less able to acquire other firms.…”

“…Third, we use the Thomson One database to collect M&A data. We set the following criteria following prior research (Ahmed and Elshandidy, 2021; Ames et al , 2020; Lim and Lee, 2015). The target companies can be either domestic or foreign, the listed status of the target can be public, private or subsidiary.…”

“…The payment method of the transaction can be stocks, cash or a combination of both. The deal value is more than one million to exclude deals made by a very tiny target (Ahmed and Elshandidy, 2021; Elrazaz et al , 2021). The M&A transaction is completed, and the acquisition deal represents more than 50% of the target firm.…”

“…On the firm level, companies become involved in M&A transactions to expand beyond the extent of their organic growth and to survive in a competitive, global world (Chadam, 2019), although some studies suggest that acquisition is likely to destroy the value of acquiring firms (Chen et al , 2016). Thus, M&A deals are among the most significant corporate decisions and statistics show significant and rapid growth in M&A deals in recent years (Murugaboopathy and Dogra, 2021; Ahmed and Elshandidy, 2021) [2].…”

Real earnings manipulation surrounding mergers and acquisitions: the targets’ perspective

“…The probit model’s dependent variable is a dummy that takes the value of one if a firm becomes a target in a given year and zero otherwise. Following Ahmed and Elshandidy (2020), explanatory variables in this model include firm size, ROA, MTB, market leverage, stock return, industry M&A liquidity index, the Herfindahl index and year and industry FE.…”