Do Capital Structure Adjustments by Takeover Targets Influence Acquisition Gains?
42 Pages Posted: 16 Mar 2011 Last revised: 8 Dec 2016
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: Suggested Citation
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