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Collateral shocks and M&A decisions

Author

Listed:
  • Hossain, Md. Imran
  • Duong, Huu Nhan
  • Al Mamun, Md
  • Docherty, Paul

Abstract

We find that positive collateral shocks caused by increases in local real estate prices increase firms' propensities to undertake mergers and acquisitions (M&As). This effect is more pronounced for financially constrained and bank-dependent firms. After collateral value appreciation, acquirers issue more bank debt, secured debt, and lines of credit to finance acquisitions and show a preference for cash offer over equity offer to finance M&As. M&As driven by positive collateral shocks create value for acquiring shareholders in the long-run by avoiding overpayments, and generating synergies. Overall, our findings highlight the importance of the collateral channel in affecting the propensity and performance of M&A deals.

Suggested Citation

  • Hossain, Md. Imran & Duong, Huu Nhan & Al Mamun, Md & Docherty, Paul, 2023. "Collateral shocks and M&A decisions," Journal of Corporate Finance, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:corfin:v:82:y:2023:i:c:s0929119923000822
    DOI: 10.1016/j.jcorpfin.2023.102433
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    References listed on IDEAS

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    1. Leming Lin, 2016. "Collateral and the Choice Between Bank Debt and Public Debt," Management Science, INFORMS, vol. 62(1), pages 111-127, January.
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    3. Sheng Huang & Ruichang Lu & Anand Srinivasan, 2022. "Bank Dependence and Bank Financing in Corporate M&A," Management Science, INFORMS, vol. 68(3), pages 2250-2283, March.
    4. Indraneel Chakraborty & Itay Goldstein & Andrew MacKinlay, 2018. "Housing Price Booms and Crowding-Out Effects in Bank Lending," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2806-2853.
    5. Hyunseob Kim & Howard Kung, 2017. "The Asset Redeployability Channel: How Uncertainty Affects Corporate Investment," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 245-280.
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    Cited by:

    1. Galloppo, Giuseppe & Guida, Roberto & Paimanova, Viktoriia, 2024. "Mutual fund flows and returns dynamics: Investor preferences and performance persistence," Research in International Business and Finance, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Collateral; Collateral shocks; Real estate; Borrowing capacity; Mergers and acquisitions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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