0 Financing - Motivated Acquisitions

  • Financing-Motivated Acquisitions, Isil Erel, +14 authors Jongsik Park
  • Published 2012

Abstract

Managers often claim that an important source of value in acquisitions is the acquiring firm’s ability to finance investments for the target firm. This claim implies that targets are financially constrained prior to being acquired and that these constraints are eased following the acquisition. We evaluate these predictions on a sample of 5,187 European acquisitions occurring between 2001 and 2008, for which we can observe the target’s financial policies following the acquisition. We examine whether these postacquisition financial policies reflect improved access to capital. We find that the level of cash target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline significantly, while investment significantly increases following the acquisition. These effects are stronger in deals that are more likely to be associated with financing improvements. These findings are consistent with the view that acquisitions ease financial frictions in target firms. *Contact information: Isil Erel, Department of Finance, Fisher College of Business, Ohio State University, Columbus, OH 43210: email: erel@fisher.osu.edu; Yeejin Jang, Department of Finance, Fisher College of Business, Ohio State University, Columbus, OH 43210: email: jang_122@fisher.osu.edu; Michael S. Weisbach, Department of Finance, Fisher College of Business, Ohio State University, Columbus, OH 43210, email: weisbach@fisher.osu.edu. Isil Erel and Michael Weisbach are Fellows of the National Center for the Middle Market at the Fisher College of Business, Ohio State University, and acknowledge the Center’s support for this research. We would like to thank Heitor Almeida, Bo Becker, Murillo Campello, Serdar Dinc, Mara Faccio, Joan FarreMensa, Antonio Galvao, Jerry Hoberg, Byoung-Hyoun Hwang, Berk Sensoy, René Stulz, Tracy Wang, and Jun Yang, as well as seminar participants at Boston College, Michigan, Ohio State, Purdue, and UBC Winter Finance Conference for helpful suggestions. We received excellent research assistance from Jongsik Park.

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Cite this paper

@inproceedings{Acquisitions20120F, title={0 Financing - Motivated Acquisitions}, author={Financing-Motivated Acquisitions and Isil Erel and Yeejin Jang and Michael S. Weisbach and Heitor Almeida and B H Becker and Murillo Campello and Serdar Dinç and M C S R Faccio and J. Farre and Antonio F. Galvao and Jerry Hoberg and Byoung-Hyoun Hwang and Berk A. Sensoy and Ren{\'e} Stulz and Tracy Y. Wang and Jongsik Park}, year={2012} }