Commitment or constraint? The effect of loan covenants on merger and acquisition activity

Gene  Ambrocio; Gonul Colak; Iftekhar  Hasan

doi:10.1016/j.frl.2022.102711

Commitment or constraint? The effect of loan covenants on merger and acquisition activity

Gene Ambrocio, Gonul Colak, Iftekhar Hasan^*

^*Corresponding author for this work

Finance, Helsinki

Research output: Contribution to journal › Article › Scientific › peer-review

4 Citations (Scopus)

Abstract

We investigate how loan covenants associated with potential target firms affect takeover deals. We propose two possible channels. Under a discipline channel, the target firm becomes an attractive candidate for takeovers and merger deals are facilitated. Under a constraint channel, covenants hinder merger activity. We find support for the latter channel. Takeover likelihood is lower, deal failures are more common, the likelihood of price renegotiation is higher, and acquisition premium is lower when the target is bound by covenants. Covenant tightness exacerbates this effect.

Original language	English
Article number	102711
Peer-reviewed scientific journal	Finance Research Letters
Volume	47
Issue number	B
ISSN	1544-6123
DOIs	https://doi.org/10.1016/j.frl.2022.102711
Publication status	Published - 06.06.2022
MoE publication type	A1 Journal article - refereed

Keywords

512 Business and Management
Mergers and acquisitions
Takeover premium
loan covenants

Areas of Strength and Areas of High Potential (AoS and AoHP)

AoS: Financial management, accounting, and governance

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.frl.2022.102711

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title = "Commitment or constraint? The effect of loan covenants on merger and acquisition activity",

abstract = "We investigate how loan covenants associated with potential target firms affect takeover deals. We propose two possible channels. Under a discipline channel, the target firm becomes an attractive candidate for takeovers and merger deals are facilitated. Under a constraint channel, covenants hinder merger activity. We find support for the latter channel. Takeover likelihood is lower, deal failures are more common, the likelihood of price renegotiation is higher, and acquisition premium is lower when the target is bound by covenants. Covenant tightness exacerbates this effect. ",

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AB - We investigate how loan covenants associated with potential target firms affect takeover deals. We propose two possible channels. Under a discipline channel, the target firm becomes an attractive candidate for takeovers and merger deals are facilitated. Under a constraint channel, covenants hinder merger activity. We find support for the latter channel. Takeover likelihood is lower, deal failures are more common, the likelihood of price renegotiation is higher, and acquisition premium is lower when the target is bound by covenants. Covenant tightness exacerbates this effect.

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Commitment or constraint? The effect of loan covenants on merger and acquisition activity

Abstract

Keywords

Areas of Strength and Areas of High Potential (AoS and AoHP)

UN SDGs

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