Capital Structure and the Market for Corporate Control: The Defensive Role of Debt Financing
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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Volume (Year): 46 (1991)
Issue (Month): 4 (September)
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