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Lookup NU author(s): Dr Yousry AhmedORCiD
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND).
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 ROA 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 (PSM) and Heckman two stage methods. Overall, our findings support the premises of agency theory and Uysal’s (2011) 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.
Author(s): Ahmed Y, Elshandidy T
Publication type: Article
Publication status: Published
Journal: International Journal of Finance & Economics
Year: 2021
Volume: 26
Issue: 3
Pages: 3436-3459
Print publication date: 01/07/2021
Online publication date: 14/07/2020
Acceptance date: 18/06/2020
Date deposited: 29/06/2020
ISSN (print): 1076-9307
ISSN (electronic): 1099-1158
Publisher: John Wiley & Sons, Inc.
URL: https://doi.org/10.1002/ijfe.1969
DOI: 10.1002/ijfe.1969
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