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Deviation from the target capital structure and acquisition choices

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  • Uysal, Vahap B.
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    Abstract

    This study finds that managers take deviations from their target capital structures into account when planning and structuring acquisitions. Specifically, firms that are overleveraged relative to their target debt ratios are less likely to make acquisitions and are less likely to use cash in their offers. Furthermore, they acquire smaller targets and pay lower premiums. Managers of overleveraged firms also actively rebalance their capital structures when they anticipate a high likelihood of making an acquisition. Finally, they pursue the most value-enhancing acquisitions. Collectively, these findings improve understanding of how firms choose their capital structures and shed light on the interdependence of capital structure and investment decisions in the presence of financial frictions.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 102 (2011)
    Issue (Month): 3 ()
    Pages: 602-620

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    Handle: RePEc:eee:jfinec:v:102:y:2011:i:3:p:602-620

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Target capital structure; M&A; Leverage deficit; Acquirer returns; Method of payment;

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    References

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    Cited by:
    1. Karampatsas, Nikolaos & Petmezas, Dimitris & Travlos, Nickolaos G., 2014. "Credit ratings and the choice of payment method in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 474-493.
    2. Cline, Brandon N. & Garner, Jacqueline L. & Yore, Adam S., 2014. "Exploitation of the internal capital market and the avoidance of outside monitoring," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 234-250.
    3. Vermaelen, Theo & Xu, Moqi, 2014. "Acquisition finance and market timing," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 73-91.

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