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The dynamics of leverage of newly controlled target firms: evidence after an acquisition

Author

Listed:
  • Hubert Bruslerie

    (Paris Dauphine-PSL University
    IAE Paris Sorbonne Business School)

  • Luminita Enache

    (University of Calgary, Haskayne School of Business)

Abstract

The paper provides insights into how debt overhang issues related to transfers of value to creditors can impact target firms’ financial policy after an acquisition. The later are natural events which introduce new prospects of value creation and possibilities of undue transfer of value to the incumbent creditors. We examine changes in leverage at the target firm before and after it is acquired in a sample of US, Canadian, and European firms over the 2000–2016 period. We find that the target’s pre-acquisition financial leverage predicts changes in its leverage after the acquisition, consistent with target firms increasing their leverage after the acquisition to avoid wealth transfer to creditors. Changes in financing structure are implemented shortly after the acquisition. The more long-term indebted the target firm, the more releveraging develops. Our results support the releveraging hypothesis as suggested by the creditors’ holdup mechanism.

Suggested Citation

  • Hubert Bruslerie & Luminita Enache, 2023. "The dynamics of leverage of newly controlled target firms: evidence after an acquisition," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 411-445, August.
    • Handle: RePEc:kap:rqfnac:v:61:y:2023:i:2:d:10.1007_s11156-023-01166-z
    DOI: 10.1007/s11156-023-01166-z
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    More about this item

    Keywords

    Creditors’ holdup; Private benefits; Debt leverage; Releveraging; Controlling shareholders; M&A;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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