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- Title
The dynamics of leverage of newly controlled target firms: evidence after an acquisition.
- Authors
De La Bruslerie, Hubert; Enache, Luminita
- 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.
- Subjects
FINANCIAL leverage; VALUE creation; FINANCIAL policy; BUSINESS enterprises; DEBTOR &; creditor; WEALTH
- Publication
Review of Quantitative Finance & Accounting, 2023, Vol 61, Issue 2, p411
- ISSN
0924-865X
- Publication type
Article
- DOI
10.1007/s11156-023-01166-z