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Do Acquisitions Relieve Target Firms' Financial Constraints?

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  • Isil Erel
  • Yeejin Jang
  • Michael S. Weisbach

Abstract

Managers often claim that an important source of value in acquisitions is the acquiring firm's ability to finance investments for the target firm. This claim implies that targets are financially constrained prior to being acquired and that these constraints are eased following the acquisition. We evaluate these predictions on a sample of 5,187 European acquisitions occurring between 2001 and 2008, for which we can observe the target's financial policies both before and after the acquisition. We examine whether target firms' post-acquisition financial policies reflect improved access to capital. We find that the level of cash target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline significantly, while investment significantly increases following the acquisition. These effects are stronger in deals that are more likely to be associated with financing improvements. These findings are consistent with the view that acquisitions ease financial frictions in target firms.

Suggested Citation

  • Isil Erel & Yeejin Jang & Michael S. Weisbach, 2013. "Do Acquisitions Relieve Target Firms' Financial Constraints?," NBER Working Papers 18840, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18840
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    More about this item

    JEL classification:

    • 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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