Strategic Underleveraging and Acquisitions

Magnus Blomkvist; Karl Felixson; Anders Löflund; Hitesh Vyas

doi:10.1016/j.jcorpfin.2022.102283

Strategic Underleveraging and Acquisitions

Magnus Blomkvist, Karl Felixson, Anders Löflund^*, Hitesh Vyas

^*Corresponding author for this work

Finance, Helsinki

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

1 Citation (Scopus)

Abstract

TThis paper investigates the Morellec and Zhdanov (2008) (MZ) prediction that firms strategically underleverage to win takeover contests. We document support for several specific MZ model predictions: pre-bid underleveraging increases with bidding competition, synergies offered by targets, investment type, industry concentration, and with firms actively adjusting their capital structure in advance of bidding. An empirically verified financial frictions explanation does not fully account for these patterns. Taken together, we find consistent evidence that strategic underleveraging conditional on the acquisition outlook is an important determinant of capital structure dynamics.

Original language	English
Article number	102283
Peer-reviewed scientific journal	Journal of Corporate Finance
Volume	76
ISSN	0929-1199
DOIs	https://doi.org/10.1016/j.jcorpfin.2022.102283
Publication status	Published - 29.08.2022
MoE publication type	A1 Journal article - refereed

Keywords

512 Business and Management
capital structure
mergers and acquisitions
industrial competition
bidding competition
strategic capital structure
financial flexibility

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

AoS: Financial management, accounting, and governance

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10.1016/j.jcorpfin.2022.102283Licence: CC BY

1-s2.0-S0929119922001262-mainFinal published version, 622 KBLicence: CC BY

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title = "Strategic Underleveraging and Acquisitions",

abstract = "TThis paper investigates the Morellec and Zhdanov (2008) (MZ) prediction that firms strategically underleverage to win takeover contests. We document support for several specific MZ model predictions: pre-bid underleveraging increases with bidding competition, synergies offered by targets, investment type, industry concentration, and with firms actively adjusting their capital structure in advance of bidding. An empirically verified financial frictions explanation does not fully account for these patterns. Taken together, we find consistent evidence that strategic underleveraging conditional on the acquisition outlook is an important determinant of capital structure dynamics.",

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AU - Blomkvist, Magnus

AU - Felixson, Karl

AU - Löflund, Anders

AU - Vyas, Hitesh

N1 - Funding Information: We would like to thank Anup Basnet, Gonul Colak, Douglas Cumming, Alexandre Garel, Peter Nyberg, Dimitris Petmezas and Milos Vulonovic as well as the editor and two anonymous referees for valuable comments. Publisher Copyright: © 2022 The Authors

PY - 2022/8/29

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N2 - TThis paper investigates the Morellec and Zhdanov (2008) (MZ) prediction that firms strategically underleverage to win takeover contests. We document support for several specific MZ model predictions: pre-bid underleveraging increases with bidding competition, synergies offered by targets, investment type, industry concentration, and with firms actively adjusting their capital structure in advance of bidding. An empirically verified financial frictions explanation does not fully account for these patterns. Taken together, we find consistent evidence that strategic underleveraging conditional on the acquisition outlook is an important determinant of capital structure dynamics.

AB - TThis paper investigates the Morellec and Zhdanov (2008) (MZ) prediction that firms strategically underleverage to win takeover contests. We document support for several specific MZ model predictions: pre-bid underleveraging increases with bidding competition, synergies offered by targets, investment type, industry concentration, and with firms actively adjusting their capital structure in advance of bidding. An empirically verified financial frictions explanation does not fully account for these patterns. Taken together, we find consistent evidence that strategic underleveraging conditional on the acquisition outlook is an important determinant of capital structure dynamics.

KW - 512 Business and Management

KW - capital structure

KW - mergers and acquisitions

KW - industrial competition

KW - bidding competition

KW - strategic capital structure

KW - financial flexibility

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Strategic Underleveraging and Acquisitions

Abstract

Keywords

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

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