IDEAS home Printed from https://ideas.repec.org/a/wsi/qjfxxx/v09y2019i04ns2010139219500125.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2010139219500125
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S2010139219500125?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Morellec, Erwan & Zhdanov, Alexei, 2008. "Financing and takeovers," Journal of Financial Economics, Elsevier, vol. 87(3), pages 556-581, March.
    2. Ming Dong & David Hirshleifer & Scott Richardson & Siew Hong Teoh, 2006. "Does Investor Misvaluation Drive the Takeover Market?," Journal of Finance, American Finance Association, vol. 61(2), pages 725-762, April.
    3. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    4. Malmendier, Ulrike & Tate, Geoffrey, 2008. "Who makes acquisitions? CEO overconfidence and the market's reaction," Journal of Financial Economics, Elsevier, vol. 89(1), pages 20-43, July.
    5. Dirk Hackbarth & Erwan Morellec, 2008. "Stock Returns in Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 63(3), pages 1213-1252, June.
    6. Bargeron, Leonce L. & Schlingemann, Frederik P. & Stulz, René M. & Zutter, Chad J., 2008. "Why do private acquirers pay so little compared to public acquirers?," Journal of Financial Economics, Elsevier, vol. 89(3), pages 375-390, September.
    7. Vallascas, Francesco & Hagendorff, Jens, 2011. "The impact of European bank mergers on bidder default risk," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 902-915, April.
    8. Sheridan Titman & Sergey Tsyplakov, 2007. "A Dynamic Model of Optimal Capital Structure," Review of Finance, European Finance Association, vol. 11(3), pages 401-451.
    9. Hunter, William C. & Jagtiani, Julapa, 2003. "An analysis of advisor choice, fees, and effort in mergers and acquisitions," Review of Financial Economics, Elsevier, vol. 12(1), pages 65-81.
    10. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    11. Harford, Jarrad & Klasa, Sandy & Walcott, Nathan, 2009. "Do firms have leverage targets? Evidence from acquisitions," Journal of Financial Economics, Elsevier, vol. 93(1), pages 1-14, July.
    12. Hayne E. Leland, 2007. "Financial Synergies and the Optimal Scope of the Firm: Implications for Mergers, Spinoffs, and Structured Finance," Journal of Finance, American Finance Association, vol. 62(2), pages 765-807, April.
    13. John A. Doukas & Dimitris Petmezas, 2007. "Acquisitions, Overconfident Managers and Self‐attribution Bias," European Financial Management, European Financial Management Association, vol. 13(3), pages 531-577, June.
    14. Hansen, Robert G, 1987. "A Theory for the Choice of Exchange Medium in Mergers and Acquisitions," The Journal of Business, University of Chicago Press, vol. 60(1), pages 75-95, January.
    15. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, March.
    16. Martin, Kenneth J, 1996. "The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership," Journal of Finance, American Finance Association, vol. 51(4), pages 1227-1246, September.
    17. Furfine, Craig H. & Rosen, Richard J., 2011. "Mergers increase default risk," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 832-849, September.
    18. Ghosh, Aloke & Jain, Prem C., 2000. "Financial leverage changes associated with corporate mergers," Journal of Corporate Finance, Elsevier, vol. 6(4), pages 377-402, December.
    19. Sara B. Moeller & Frederik P. Schlingemann & René M. Stulz, 2007. "How Do Diversity of Opinion and Information Asymmetry Affect Acquirer Returns?," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 2047-2078, November.
    20. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1991. "A test of the free cash flow hypothesis*1: The case of bidder returns," Journal of Financial Economics, Elsevier, vol. 29(2), pages 315-335, October.
    21. Fama, Eugene F. & French, Kenneth R., 2005. "Financing decisions: who issues stock?," Journal of Financial Economics, Elsevier, vol. 76(3), pages 549-582, June.
    22. Eckbo, B Espen & Giammarino, Ronald M & Heinkel, Robert L, 1990. "Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 651-675.
    23. K. J. Martijn Cremers & Vinay B. Nair & Kose John, 2009. "Takeovers and the Cross-Section of Returns," The Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1409-1445, April.
    24. Bruner, Robert F., 1988. "The Use of Excess Cash and Debt Capacity as a Motive for Merger," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(2), pages 199-217, June.
    25. Houston, Joel F. & James, Christopher M. & Ryngaert, Michael D., 2001. "Where do merger gains come from? Bank mergers from the perspective of insiders and outsiders," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 285-331, May.
    26. Berkovitch, Elazar & Narayanan, M P, 1990. "Competition and the Medium of Exchange in Takeovers," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 153-174.
    27. repec:bla:jfinan:v:44:y:1989:i:1:p:19-40 is not listed on IDEAS
    28. Jarrad Harford, 1999. "Corporate Cash Reserves and Acquisitions," Journal of Finance, American Finance Association, vol. 54(6), pages 1969-1997, December.
    29. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers RPF-278, University of California at Berkeley.
    30. Uysal, Vahap B., 2011. "Deviation from the target capital structure and acquisition choices," Journal of Financial Economics, Elsevier, vol. 102(3), pages 602-620.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mario Fischer, 2015. "Challenging the payment effect in bank-financed takeovers," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(4), pages 347-376, October.
    2. Dutordoir, Marie & Strong, Norman C. & Sun, Ping, 2022. "Does short-selling potential influence merger and acquisition payment choice?," Journal of Financial Economics, Elsevier, vol. 144(3), pages 761-779.
    3. Karampatsas, Nikolaos & Petmezas, Dimitris & Travlos, Nickolaos G., 2014. "Credit ratings and the choice of payment method in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 474-493.
    4. Yang Zhang, 2018. "Corporate Governance Effects on Risk Management and Shareholder Wealth: The Case of Mergers and Acquisitions," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4-2018, January-A.
    5. Andrey Golubov & Dimitris Petmezas & Nickolaos G. Travlos, 2013. "Empirical mergers and acquisitions research: a review of methods, evidence and managerial implications," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 12, pages 287-313, Edward Elgar Publishing.
    6. Attaoui, Sami & Cao, Wenbin & Six, Pierre, 2021. "Capital structure and the optimal payment methods in acquisitions," International Review of Law and Economics, Elsevier, vol. 66(C).
    7. Merkoulova, Yulia & Zivanovic, Branislav, 2022. "Financial constraints and financing sources in mergers and acquisitions," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    8. Schlingemann, Frederik P., 2004. "Financing decisions and bidder gains," Journal of Corporate Finance, Elsevier, vol. 10(5), pages 683-701, November.
    9. Uysal, Vahap B., 2011. "Deviation from the target capital structure and acquisition choices," Journal of Financial Economics, Elsevier, vol. 102(3), pages 602-620.
    10. Murray, Benjamin & Svec, Jiri & Wright, Danika, 2017. "Wealth transfer, signaling and leverage in M&A," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 203-212.
    11. Vermaelen, Theo & Xu, Moqi, 2014. "Acquisition finance and market timing," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 73-91.
    12. Eckbo, B. Espen, 2009. "Bidding strategies and takeover premiums: A review," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 149-178, February.
    13. Utz Weitzel & Killian J. McCarthy, 2011. "Theory and evidence on mergers and acquisitions by small and medium enterprises," International Journal of Entrepreneurship and Innovation Management, Inderscience Enterprises Ltd, vol. 14(2/3), pages 248-275.
    14. Agliardi, Elettra & Amel-Zadeh, Amir & Koussis, Nicos, 2016. "Leverage changes and growth options in mergers and acquisitions," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 37-58.
    15. Alexandridis, George & Chen, Zhong & Zeng, Yeqin, 2021. "Financial hedging and corporate investment," Journal of Corporate Finance, Elsevier, vol. 67(C).
    16. Eckbo, B. Espen & Makaew, Tanakorn & Thorburn, Karin S., 2018. "Are stock-financed takeovers opportunistic?," Journal of Financial Economics, Elsevier, vol. 128(3), pages 443-465.
    17. Alexandridis, George & Antypas, Nikolaos & Gulnur, Arman & Visvikis, Ilias, 2020. "Corporate financial leverage and M&As choices: Evidence from the shipping industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 133(C).
    18. Harford, Jarrad & Klasa, Sandy & Walcott, Nathan, 2009. "Do firms have leverage targets? Evidence from acquisitions," Journal of Financial Economics, Elsevier, vol. 93(1), pages 1-14, July.
    19. Li, Yuanzhi, 2018. "Dissecting bidder security returns on payment methods," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 207-220.
    20. Bruyland, Evy & Lasfer, Meziane & De Maeseneire, Wouter & Song, Wei, 2019. "The performance of acquisitions by high default risk bidders," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 37-58.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:qjfxxx:v:09:y:2019:i:04:n:s2010139219500125. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/qjf/qjf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.