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Effect of leverage deviation on choices and outcomes of public versus non-public acquisitions

Lookup NU author(s): Dr Yousry Ahmed



This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND).


This paper examines whether firms’ deviation from target leverage may predict types and outcomes of mergers and acquisitions (M&A) deals. We find that over-levered firms are more inclined to be involved in public acquisitions than non-public acquisitions. Consistent with the proposition of information economics theory, our findings suggest that information asymmetry is the main motive behind over-levered firms’ preference for public targets. Specifically, we observe that over-levered acquirers not only prefer public targets, but also pick those with less information asymmetry. We find that, in the short term, the market reacts negatively to the announcement of public acquisitions by over-levered firms. However, in the long term these acquirers experience better operating synergies and values, measured by changes in ROA and Tobin’s q, respectively. Our results are robust after controlling for M&A deals-, firm-, industry-characteristics and endogeneity concerns using both propensity score matching (PSM) and Heckman two stage methods. Overall, our findings support the premises of agency theory and Uysal’s (2011) view that over-levered firms have a high tendency to pursue most value-enhancing acquisition deals due to the high pressure of holding high levels of debt.

Publication metadata

Author(s): Ahmed Y, Elshandidy T

Publication type: Article

Publication status: Published

Journal: International Journal of Finance & Economics

Year: 2021

Volume: 26

Issue: 3

Pages: 3436-3459

Print publication date: 01/07/2021

Online publication date: 14/07/2020

Acceptance date: 18/06/2020

Date deposited: 29/06/2020

ISSN (print): 1076-9307

ISSN (electronic): 1099-1158

Publisher: John Wiley & Sons, Inc.


DOI: 10.1002/ijfe.1969


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