Post-Merger Integration Duration and Leverage Dynamics of Mergers: Theory and Evidence

Abstract

We introduce the concept of the post-merger integration duration (PMID) which is the time delay that it takes a merged entity to fully capture synergistic gains. Using a dynamic model, we examine the effects of this duration on acquiring firms’ financing behavior around mergers. When facing a longer PMID, acquiring firms optimally choose lower leverage prior to and at the time of a merger, and gradually levers up as the integration period nears completion. We hand collect a unique data set on the integration duration of mergers and provide strong empirical support for the model implications.

Keywords: Capital Structure, Merger, Acquisition, Firm Financial Structure, Financing Policy, Leverage

JEL Classification: G32, G34