Wealth transfer, signaling and leverage in M&A

Optimal capital structure with supplier market power

“…This is indeed what we see in mergers and acquisitions; empirical studies find that leverage ratios increase significantly after mergers and acquisitions, see for example, Chkir and Cosset (2003), Ghosh and Jain (2000) and Murray et al. (2017). Of course, the diversification effect (resulting in increase in debt capacity) can help explain higher leverage ratios in conglomerate acquisitions.…”

“…Result 1 implies that, if the firm was to acquire its supplier (switch from separate to integrated), then its optimal leverage ratio will increase after the acquisition; therefore, companies should increase leverage ratio after acquisitions. This is indeed what we see in mergers and acquisitions; empirical studies find that leverage ratios increase significantly after mergers and acquisitions, see for example, Chkir and Cosset (2003), Ghosh and Jain (2000) and Murray et al (2017). Of course, the diversification effect (resulting in increase in debt capacity) can help explain higher leverage ratios in conglomerate acquisitions.…”

Earnouts: The real value of disagreement in mergers and acquisitions

“…From a more general perspective, default risk has been proven to play a key role in M&As. Acquisitions tend to increase the risk of default of the bidder (Bruyland et al, 2019;Furfine & Rosen, 2011), whose abnormal returns are influenced by its leverage (Murray et al, 2017). Our paper verifies that the return obtained by the seller, or its premium, can also be influenced by the default risk of the bidder: In M&As that include earnouts, the more the bidder is exposed to default risk, the lower the value of the consideration received by the sellers.…”

“…Hagendorff and Vallascas (2011) confirmed this idea by substantiating that CEOs with higher pay-risk sensitivity tend to carry out acquisitions that raise default risk. Murray et al (2017) provide further evidence that when the payment method or the methods for deal financing increase leverage, the bidder's risk of default sees an upturn as well. These authors went on to verify that this increase in leverage is positively related to the bidder's abnormal equity returns, which they see as compensation for the heightened risk borne by stockholders.…”

Does Margin Call Pressure Affect the M&A Decision of Controlling Shareholders With Equity Pledges: Evidence From Chinese Listed Company

“…The reason is that, on the one hand, M&A is one of the important ways for the company to achieve exogenous growth, which will help the company to achieve the expansion of asset scale, the rapid growth of sales revenue and profits, and then bring the growth of market value to the company. On the other hand, it is difficult for small and medium-sized investors to judge the economic essence of M&A transactions of listed companies and identify potential opportunistic behaviors, such as interest transfer or hollowing out ( Murray et al, 2017 ), and they can only respond positively to M&A news habitually or in conformity. Considering that the controlling shareholder of the pledged shares is most concerned about raising the stock price to avoid the potential transfer of control caused by margin calls and forced sale of shares, we suggest that the equity pledge of the controlling shareholder may encourage enterprises to seek value-added investment opportunities and actively participate in M&A activities.…”