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Leverage, premium and timing in corporate acquisitions

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  • Pires, Marco
  • Pereira, Paulo J.

Abstract

This paper investigates how leverage affects the dynamics of acquisitions. Pursuing this objective, the optimal leverage, premium and timing are jointly determined. We show that leverage increases with growth prospects (acquisition synergies), whereas an ambiguous effect is produced by volatility. Additionally, we show that levered acquisitions occur sooner and lead to higher premiums to target firms, when compared to a deal fully financed by equity. These impacts are similar to those produced by taxation.

Suggested Citation

  • Pires, Marco & Pereira, Paulo J., 2020. "Leverage, premium and timing in corporate acquisitions," Economics Letters, Elsevier, vol. 188(C).
    • Handle: RePEc:eee:ecolet:v:188:y:2020:i:c:s0165176519304756
    DOI: 10.1016/j.econlet.2019.108933
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Luis Alvarez & Rune Stenbacka, 2006. "Takeover Timing, Implementation Uncertainty, and Embedded Divestment Options," Review of Finance, European Finance Association, vol. 10(3), pages 417-441, September.
    3. Lukas, Elmar & Welling, Andreas, 2012. "Negotiating M&As under uncertainty: The influence of managerial flexibility on the first-mover advantage," Finance Research Letters, Elsevier, vol. 9(1), pages 29-35.
    4. Sudipto Sarkar, 2011. "Optimal Expansion Financing and Prior Financial Structure," International Review of Finance, International Review of Finance Ltd., vol. 11(1), pages 57-86, March.
    5. Mauer, David C. & Sarkar, Sudipto, 2005. "Real options, agency conflicts, and optimal capital structure," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1405-1428, June.
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    7. Lukas, Elmar & Pereira, Paulo J. & Rodrigues, Artur, 2019. "Designing optimal M&A strategies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 1-20.
    8. Lambrecht, Bart M., 2004. "The timing and terms of mergers motivated by economies of scale," Journal of Financial Economics, Elsevier, vol. 72(1), pages 41-62, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Leverage; Mergers and acquisitions; Real options;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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