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Can Post-Merger Integration Costs and Synergy Delays Explain Leverage Dynamics of Mergers?

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  • Sergey Tsyplakov

    (University of South Carolina, Columbia, USA)

Abstract

The integration of two merging firms takes time to complete, and synergy gains from a merger can be captured only after the firms go through a costly and often lengthy post-merger integration period. This paper presents a dynamic model of capital structure for the target firm and the acquirer to examine the effects of the integration period on acquiring firms’ financing behavior around mergers. The model generates predictions that provide rational (non-behavioral) explanations for documented empirical evidence regarding leverage dynamics around mergers. When anticipating a longer and costlier integration period, acquiring firms strategically plan ahead by choosing a lower leverage prior to and at the time of the merger, and gradually lever up as the post-merger integration process nears completion. Deals with longer integration periods are financed with a larger fraction of equity. The model also implies that acquiring firms optimally time takeovers of underleveraged firms that experience negative shocks to their earnings.

Suggested Citation

  • Sergey Tsyplakov, 2019. "Can Post-Merger Integration Costs and Synergy Delays Explain Leverage Dynamics of Mergers?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(04), pages 1-36, December.
    • Handle: RePEc:wsi:qjfxxx:v:09:y:2019:i:04:n:s2010139219500125
    DOI: 10.1142/S2010139219500125
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    References listed on IDEAS

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