Cash Richness and Propensity to Acquire –An Empirical Examination Based on Largest Deals (original) (raw)
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Financial Characteristics of Acquiring Firms: An Industry Specific Approach
Review of Financial Economics, 1992
This paper examines the sources of value to acquiring firms to expand the understanding of mergers and acquisitions. The firmspecific rationale that motivate firms to acquire other firms are examined, along with how these rationale impact the shareholder wealth of acquiring firms when the acquisitions are announced. A logit regression model is utilized to compare financial characteristics of acquiring firms to those of non-acquiring firms. The relation of these characteristics to the shareholder wealth effects experienced by acquiring firms when they announce acquisitions is also examined. The results support hypotheses that firm size and cashflow payout impact the decision to acquire. Capital structure, management performance, and cash-flow payout are related to the wealth effects of acquisition announcements. Better fitting models result when industry effects are controlled by measuring firm characteristics as relative deviations from industry values.
Journal of Economics and Finance, 1993
This paper examines the sources of value to acquiring firms to expand the understanding of mergers and acquisitions. The firmspecific rationale that motivate firms to acquire other firms are examined, along with how these rationale impact the shareholder wealth of acquiring firms when the acquisitions are announced. A logit regression model is utilized to compare financial characteristics of acquiring firms to those of non-acquiring firms. The relation of these characteristics to the shareholder wealth effects experienced by acquiring firms when they announce acquisitions is also examined. The results support hypotheses that firm size and cashflow payout impact the decision to acquire. Capital structure, management performance, and cash-flow payout are related to the wealth effects of acquisition announcements. Better fitting models result when industry effects are controlled by measuring firm characteristics as relative deviations from industry values.
DISCUSSION PAPER SERIES M&A ACTIVITY AND THE CAPITAL STRUCTURE OF TARGET FIRMS
Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite rapidly -within a year of the acquisition. The typical over-levered firm adjusts its debt-to-assets ratio from 34.4% in the year before acquisition to 20% in the year after. (The adjustment is smaller, but still quite rapid, for targets that had been under-leveraged.) These adjustments occur primarily through debt issuances or retirements. We also investigate whether target firms' pre-merger leverage contributes to the probability of them being acquired. We find that firms further away from their optimal leverage are more likely to be acquired: for an average firm, an increase in the absolute leverage deviation from 1% to 10% of total assets increases the probability of being acquired by 4.1% to 5.6% (The larger effect applies to over-leveraged firms.) Overall, our results provide support for the trade-off theory of capital structure and suggest that financial synergies have a significant role in the typical European acquisition decision.
M&A Activity and the Capital Structure of Target Firms
Social Science Research Network, 2020
Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite rapidlywithin a year of the acquisition. The typical over-levered firm adjusts its debtto-assets ratio from 34.4% in the year before acquisition to 20% in the year after. (The adjustment is smaller, but still quite rapid, for targets that had been under-leveraged.) These adjustments occur primarily through debt issuances or retirements. We also investigate whether target firms' pre-merger leverage contributes to the probability of them being acquired. We find that firms further away from their optimal leverage are more likely to be acquired: for an average firm, an increase in the absolute leverage deviation from 1% to 10% of total assets increases the probability of being acquired by 4.1% to 5.6% (The larger effect applies to overleveraged firms.) Overall, our results provide support for the trade-off theory of capital structure and suggest that financial synergies have a significant role in the typical European acquisition decision.
A Model to Identify the Potential Target for Leveraged Buyout
Jurnal keuangan dan perbankan, 2022
This study aims to find a model based on agency theory to identify the target firms of leveraged buyout (LBO) transactions one year ahead. The likelihood of a firm being a target in an LBO transaction is estimated using logistic regression. The dependent variable is defined as one for the LBO target and zeroes otherwise. The independent variables are a firm's financial characteristics related to agency problems: leverage, tangible assets, free cash flow, market-to-book value ratio, profitability, and revenue growth. The sample is public-to-private LBO transactions in the United States from 2009 to 2019. We find that a firm with high leverage and free cash flow is more likely to become an LBO target. The findings are consistent with the agency theory. The management uses firm high free cash flow to gain more debt to pursue their benefits which is detrimental to shareholders' interest. Contrary to previous research, the firm's tangible asset does not increase the likelihood of becoming an LBO target.
Does acquirer cash level predict post-acquisition returns
Review of Accounting Studies, 2008
Acquirers with high cash balances on the announcement date often suffer negative postacquisition returns. High acquirer cash also predicts negative post-acquisition return on net operating assets, suggesting that the market does not fully incorporate the "bad news" associated with a high cash balance into the acquirer's stock price on announcement, but does respond to poor operating performance in the post-acquisition period. An implementable trading strategy combining these findings with prior research yields average annual abnormal returns of 22%.
2019
By using a large sample of Norwegian public and private firms, we study the effect of access to public equity markets on the firm’s capital structure, leverage deficit, and acquisition probability. We find that publicly listed firms use less debt financing compared to private firms and conclude that this is driven by the higher costs of asymmetric information facing unlisted firms. Next, we provide evidence that both types of firms have target capital structures and show that access to capital enables listed firms to rebalance their leverage ratio quicker towards this target compared to unlisted ones. Finally, we present evidence against the free cash flow theory as we find that underleveraging significantly reduces the likelihood of undertaking acquisitions. We show that access to capital has no significant effect on this relationship between the leverage deficit and the acquisition probability. JEL Classification: G32; G34
Mergers and acquisitions and corporate financial leverage - an empirical analysis of UK firms
2013
This thesis examines the link between mergers and acquisitions (MA and (2) the changes in financial leverage prior to firms' decision to initiate M&As. The empirical evidence on the proposed hypotheses is based on a large sample of firms in the UK during the period 1996 and 2006. The empirical analysis presented in this study contributes to the large and growing body of literature on the interdependence of corporate financing and investment decisions. Specifically, this study contributes to the literature in two ways. First, the thesis investigates the link between firms leverage deviations (i.e. the deviations of firms observed leverage ratios from target leverage ratios) and the probability of undertaking MA for domestic acquisitions (i.e. deals in which the acquirer and the target firm are domiciled in the same country); and for focused (i.e. single-segment) firms undertaking acquisitions. Thus, the leverage deviation effect is not symmetric for all types of acquisitions and ...
Target Capital Structure and Acquisition Choices: Evidence from the Greek Market
The main objective of this paper is to analyze whether deviations from the target capital structure affect firms' decisions to become acquirers. The analysis is conducted in two stages. In the first stage we estimate the target leverage ratio considering the main determinants of capital structure. In the second stage we examine whether the deviation from the predicted target debt ratio affects acquisition choices. Our data come from 112 Greek companies listed on the Athens Exchange during 1997-2002. Our empirical results justify our hypothesis that the leverage deficit is negatively related to the probability of a firm becoming an acquirer. Thus, underleveraged firms, according to their target capital structure, are more likely to become acquirers than overleveraged firms. We also test whether size and profitability affect acquisition choices and we find that larger firms are more likely to become acquirers, whereas profitability does not seem to play an important role. Results and conclusions are consistent with similar studies conducted for other economies. JEL Classifications: G3, G32.