TY - JOUR
T1 - Leverage and Acquisition Performance
AU - Hart, Matthew
AU - Oler, Derek
AU - Harrison, Jeffrey
N1 - Funding Information:
Stock price and shares outstanding are taken from the CRSP database. All financial statement information is taken from the combined CRSP/Compustat (annual) database provided by Wharton Research Data Services (WRDS). Information is taken at the most recent month-end that is at least 30 days before the announcement of the acquisition. We assume a 3-month lag between a firm’s year-end and when annual financial statements are publicly available, and a 45 day lag between a firm’s quarter-end and when quarterly financial statements are publicly available. Our multivariate BHARs are calculated as follows:
Publisher Copyright:
© 2013, Springer Science+Business Media New York.
PY - 2014/10
Y1 - 2014/10
N2 - From an agency perspective, leverage may have a positive effect on firm performance by limiting managers’ ability to allocate resources to unproductive uses, as well as increasing pressure on them to perform well. Consequently, we might expect leverage to have a positive impact on acquisition performance. However, the increased risks associated with higher leverage, combined with the other risks inherent in an acquisition, could also cause managers to take actions to reduce risk even if doing so is contrary to value maximization. High debt levels might also limit managerial discretion over how resources are allocated during the acquisition process, which can have a negative impact on performance. We investigate the effect of leverage on post-acquisition stock performance and find that post-acquisition performance is decreasing in leverage brought by the target firm and in additional leverage taken on to execute the acquisition. This negative performance is clustered among acquirers who are already financially constrained. Our results are robust to various returns measurement methodologies and to the inclusion of several controls known to predict future returns. Our results also represent viable investment strategies, and suggest that the market underestimates difficulties that arise from acquisition-related increases in leverage.
AB - From an agency perspective, leverage may have a positive effect on firm performance by limiting managers’ ability to allocate resources to unproductive uses, as well as increasing pressure on them to perform well. Consequently, we might expect leverage to have a positive impact on acquisition performance. However, the increased risks associated with higher leverage, combined with the other risks inherent in an acquisition, could also cause managers to take actions to reduce risk even if doing so is contrary to value maximization. High debt levels might also limit managerial discretion over how resources are allocated during the acquisition process, which can have a negative impact on performance. We investigate the effect of leverage on post-acquisition stock performance and find that post-acquisition performance is decreasing in leverage brought by the target firm and in additional leverage taken on to execute the acquisition. This negative performance is clustered among acquirers who are already financially constrained. Our results are robust to various returns measurement methodologies and to the inclusion of several controls known to predict future returns. Our results also represent viable investment strategies, and suggest that the market underestimates difficulties that arise from acquisition-related increases in leverage.
KW - Acquisitions
KW - Capital structure
KW - Leverage
KW - Post-acquisition performance
UR - http://www.scopus.com/inward/record.url?scp=84879390662&partnerID=8YFLogxK
U2 - 10.1007/s11156-013-0385-5
DO - 10.1007/s11156-013-0385-5
M3 - Article
VL - 43
SP - 571
EP - 603
JO - Review of Quantitative Finance and Accounting
JF - Review of Quantitative Finance and Accounting
IS - 3
ER -