Do Capital Structure Adjustments by Takeover Targets Influence Acquisition Gains?

42 Pages Posted: 16 Mar 2011 Last revised: 8 Dec 2016

See all articles by Tomas Jandik

Tomas Jandik

University of Arkansas - Sam M. Walton College of Business

Justin L. Lallemand

University of Denver - Reiman School of Finance

Date Written: November 10, 2016

Abstract

We link debt issuances by target companies around takeover announcements to enhanced target bargaining power in negotiations with bidders over merger synergy gains in completed takeovers. Announcements of debt issuances by targets – especially new bank loans – are associated with more positive target equity returns relative to those made by non-targets, particularly for debt issuances immediately surrounding the takeover announcement. At least some of these gains to targets come at the expense of bidder shareholders, as bidder equity abnormal returns at target debt issuance are negative. We further show that targets issuing debt are primarily those with relatively low acquisition abnormal returns, consistent with initially poor target bargaining power. Subsequent debt issuances by targets increase the likelihood of positive adjustments to acquisition premiums offered by acquirers.

Keywords: Debt issuance; Mergers and acquisition gains; Bank debt

JEL Classification: G32, G34

Suggested Citation

Jandik, Tomas and Lallemand, Justin L., Do Capital Structure Adjustments by Takeover Targets Influence Acquisition Gains? (November 10, 2016). Available at SSRN: https://ssrn.com/abstract=1787825 or http://dx.doi.org/10.2139/ssrn.1787825

Tomas Jandik (Contact Author)

University of Arkansas - Sam M. Walton College of Business ( email )

WCOB 302
Fayetteville, AR 72701
United States
479-575-6147 (Phone)

Justin L. Lallemand

University of Denver - Reiman School of Finance ( email )

Denver, CO
United States
479-721-3071 (Phone)

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