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Capital Structure and the Market for Corporate Control: The Defensive Role of Debt Financing

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  • Israel, Ronen

Abstract

A capital structure theory based on corporate control considerations is presented. The optimal debt level balances a decrease in the probability of acquisition against a higher share of the synergy for the target's shareholders. This leads to the following implications: (1) the probability of firms becoming acquisition targets decreases with their leverage; (2) acquirers' share of the total equity gain increases with targets' leverage; (3) when acquisitions are initiated, targets' stock price, targets' debt value, and acquirers' firm value increase; and (4) during the acquisition, target firms' stock price changes further; the expected change is zero and the variance decreases with targets' debt level. Copyright 1991 by American Finance Association.

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  • Israel, Ronen, 1991. "Capital Structure and the Market for Corporate Control: The Defensive Role of Debt Financing," Journal of Finance, American Finance Association, vol. 46(4), pages 1391-1409, September.
    • Handle: RePEc:bla:jfinan:v:46:y:1991:i:4:p:1391-1409
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