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Why do over-deviated firms from target leverage undertake foreign acquisitions?

Lookup NU author(s): Dr Yousry AhmedORCiD

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Abstract

This paper examines how deviation from firms’ target leverage influences their decisions on undertaking foreign acquisitions. Using a sample of 5746 completed bids by UK acquirers from 1987 to 2012, we observe that overdeviated firms are more likely to acquire foreign targets. Consistent with co-insurance theory, we find that overdeviated firms engage in foreign acquisition deals to relieve their financial constraints and to mitigate their financial distress risk. We also note that foreign acquisitions enhance over-deviated firms’ value and performance, measured by Tobin’s q and return on assets (ROA) respectively. These findings support the view that over-deviated firms pursue the most value-enhancing acquisitions. Overall, this paper suggests that co-insurance effects, value creation and performance improvements are the main incentives for over-deviated firms’ involvement in foreign acquisitions.

Publication metadata

Author(s): Ahmed Y, Elshandidy T

Publication type: Article

Publication status: Published

Journal: International Business Review

Year: 2018

Volume: 27

Issue: 2

Pages: 309-327

Print publication date: 01/04/2018

Online publication date: 30/08/2017

Acceptance date: 21/08/2017

ISSN (print): 0969-5931

ISSN (electronic): 0962-9262

Publisher: Elsevier

URL: https://doi.org/10.1016/j.ibusrev.2017.08.005

DOI: 10.1016/j.ibusrev.2017.08.005

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