Corporate acquisitions and financial constraints

Abstract

Using a large sample of US acquisitions made between 1985 and 2013, we study the effect of financial constraints on acquisition gains and acquisition likelihood. Our findings show that financial constraints of target companies significantly increase acquisition premiums and abnormal returns for both parties. Our results further show that the presence of financial constraints in the target is one of the most important determinants of a takeover bid. This supports the idea that acquisitions may improve the ability of financially constrained companies to access capital through a better reallocation of resources within segments of the same company (e.g., internal capital market) or through better access to external markets. This would eventually benefit bidders too, as new capital would be invested in valuable growth opportunities that otherwise would expire unexercised.JEL Classification: G32, G34

Effects of foreign acquisitions on financial constraints, productivity and investment in R&D of target firms in China

“…A number of researchers have documented that foreign direct investors play an important role in alleviating financial constraints by bringing scarce capital into the host country firms (Harrison et al, 2004;Héricourt and Poncet 2009;Erel et al, 2015;Khatami et al, 2015). If acquisitions indeed ease financial constraints of the target firms, then the intriguing question that follows is that, do the acquisitions lead to an increase in investment in R&D and improve productivity of the relieved firms?…”

“…Using a sample of US acquisitions, Khatami et al (2015) rendered some support to the view acquisitions improve financially constrained firms' ability to access capital through a better re-allocation of resources.…”

“…Prior studies indicate that financial constraints occur when financial frictions prevent firms from undertaking all desirable investments. While a large body of literature has been devoted to the identification of the level of financial constraints faced by firms, there appears to be no consensus on which measure is the best proxy (Khatami et al, 2015;Erel et al, 2015).…”

“…While recent studies have examined whether acquisitions can potentially mitigate financial constraints of target firms and increase the number of investments (see Almeida et al, 2011;Khatami et al, 2015;Erel et al, 2015) in the context of developed countries, relatively little evidence exists in emerging countries (Cull et al, 2015). The few studies that examine the financial constraints in emerging countries focus on domestic firms with no study on the effects of foreign acquisitions on financial constraints, R&D and productivity of target firms.…”

Chief Executive Officer Succession and Financial Constraints: Evidence from China

“…Several criteria have been proposed to identify the level of financial constraints faced by firms; nevertheless, there is no general agreement on which measure is the best proxy, for each measure has limitations (Khatami et al ., ). To decrease the concerns about measurement error, we employ three measures to determine whether there will be similar results.…”