Can Firms Loosen Financial Constraints?

Abstract

This paper studies the ability of firms to impact its own financial constraint status. First, we study the persistence of firms’ financial constraint status and show that this changes across time. Next, we find that diversified firms are less financially constrained than single segment firms. Additionally, among diversified firms, those that are more concentrated in their main industries are more constrained than those that are less concentrated. This leads us to examine the ability of firms to ease financial constraints through acquisitions. The results show that aquirers that are relatively more constrained become less constrained following an acquisition. Acquiring a target in the same industries hinders this loosening of financial constraints. Furthermore, the reduction in financial constraint status increases with the difference between acquirer and target financial constraint status in the pre-acquisition period. The results are robust to several measures of financial constraints.

Keywords: financing constraints, acquisitions, diversification