SPEED OF ADJUSTMENT TOWARD CAPITAL STRUCTURE IN CROSS BORDER AND CROSS INDUSTRY MERGERS AND ACQUISITIONS

Abstract

Purpose - In this study, the speed of adjustment (SOA) toward target capital structure is investigated in cross border and cross industry mergers and acquisitions (M&A).

Methodology - As a measure of capital structure both book leverage (BLEV) and market leverage (MLEV) ratios are used in the analysis. The sample consists of 6,520 M&A deals for the period of 2000-2016.

Findings - The findings show that for both the BLEV and MLEV, the cross border M&A deals move faster toward the target capital structure compared to non-cross border M&A deals. While the SOA rate for the same and cross industry M&A cases does not show too much difference for BLEV and MLEV.

Conclusion - Overall the firms adjust to their target capital structure in maximum three years following the M&A

Keywords

• Speed of adjustment,cross border M&A,cross industry M&A,target capital structure,merger and acquisition

References

1. Altinkilic, O., Hansen, R. S. (2000). Are there economies of scale in underwriting fees? Evidence of rising external financing costs. The Review of Financial Studies, 13(1), 191-218.
2. Amihud, Y., Lev, B. (1981). Risk reduction as a managerial motive for conglomerate mergers. The Bell Journal of Economics, 12(2) 605-617.
3. Antoniou, A., Guney, Y., Paudyal, K. (2008). The determinants of capital structure: capital market-oriented versus bank-oriented institutions. Journal of Financial and Quantitative Analysis, 43(1), 59-92.
4. Auerbach, A. J. (1985). The theory of excess burden and optimal taxation. In Handbook of Public Economics. Elsevier Science Publishers. 1, 61-127.
5. Baker, M., Wurgler, J., (2002). Market timing and capital structure. The Journal of Finance 57, 1-32.
6. Borio, C. E. V. (1990). Leverage and financing of non-financial companies: an international perspective. Bank for International Settlements (BIS), Economic Papers No. 27, 1-82.
7. Byoun, S. (2008). How and when do firms adjust their capital structures toward targets?. The Journal of Finance, 63(6), 3069-3096.
8. Cook, D. O., Tang, T. (2010). Macroeconomic conditions and capital structure adjustment speed. Journal of Corporate Finance, 16(1), 73-87.

9. Fama, E. F., French, K. R. (1997). Industry costs of equity. Journal of Financial Economics, 43(2), 153-193.
10. Fama, E. F., French, K. R. (2002). Testing trade-off and pecking order predictions about dividends and debt. The Review of Financial Studies, 15(1), 1-33.
11. Faulkender, M., Flannery, M. J., Hankins, K. W., Smith, J. M. (2012). Cash flows and leverage adjustments. Journal of Financial Economics, 103(3), 632-646.
12. Faulkender, M., Kadyrzhanova, D., Prabhala, N., Senbet, L. (2010). Executive compensation: An overview of research on corporate practices and proposed reforms. Journal of Applied Corporate Finance, 22(1), 107-118.
13. Fischer, E. O., Heinkel, R., Zechner, J. (1989). Dynamic capital structure choice: Theory and tests. The Journal of Finance, 44(1), 19-40.
14. Flannery, M. J., Rangan, K. P. (2006). Partial adjustment toward target capital structures. Journal of Financial Economics, 79(3), 469-506.
15. Ghosh, A., Jain, P. C. (2000). Financial leverage changes associated with corporate mergers. Journal of Corporate Finance, 6(4), 377-402.
16. Graham, J. R., Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.
17. Gugler, K., Konrad, K. A. (2002). Merger target selection and financial structure. University of Vienna and Wissenschaftszentrum Berlin (WZB).
18. Harford, J. (2005). What drives merger waves?. Journal of Financial Economics, 77(3), 529-560.
19. Harford, J., Klasa, S., Walcott, N. (2009). Do firms have leverage targets? Evidence from acquisitions. Journal of Financial Economics, 93(1), 1-14.
20. Higgins, R. C., Schall, L. D. (1975). Corporate bankruptcy and conglomerate merger. The Journal of Finance, 30(1), 93-113.
21. Hovakimian, A. (2006). Are observed capital structures determined by equity market timing?. Journal of Financial and Quantitative Analysis, 41(1), 221-243.
22. Hovakimian, A., Hovakimian, G., Tehranian, H. (2004). Determinants of target capital structure: The case of dual debt and equity issues. Journal of Financial Economics, 71(3), 517-540.
23. Hovakimian, A., Opler, T., Titman, S. (2001). The debt-equity choice. Journal of Financial and Quantitative Analysis, 36(1), 1-24.
24. Huang, R., Ritter, J. R. (2009). Testing theories of capital structure and estimating the speed of adjustment. Journal of Financial and Quantitative Analysis, 44(2), 237-271.
25. Jalilvand, A., Harris, R. S. (1984). Corporate behavior in adjusting to capital structure and dividend targets: An econometric study. The Journal of Finance, 39(1), 127-145.
26. Jarrell, G. A., Brickley, J. A., Netter, J. M. (1988). The market for corporate control: The empirical evidence since 1980. Journal of Economic Perspectives, 2(1), 49-68.
27. Jensen, M. C., Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
28. Kayhan, A., Titman, S. (2007). Firms’ histories and their capital structures. Journal of Financial Economics, 83(1), 1-32.
29. Leary, M. T., Roberts, M. R. (2005). Do firms rebalance their capital structures?. The Journal of Finance, 60(6), 2575-2619.
30. Leland, H. E. (2007). Financial synergies and the optimal scope of the firm: Implications for mergers, spinoffs, and structured finance. The Journal of Finance, 62(2), 765-807.
31. Lewellen, W. G. (1971). A pure financial rationale for the conglomerate merger. The Journal of Finance, 26(2), 521-537.
32. Lintner, J. (1971). Expectations, mergers and equilibrium in purely competitive securities markets. The American Economic Review, 61(2), 101-111.
33. Mai, Y., Meng, L., Ye, Z. (2017). Regional variation in the capital structure adjustment speed of listed firms: Evidence from China. Economic Modelling, 64, 288-294.
34. Markham, J. W. (1973). Conglomerate Enterprise and Economic Performance. Cambridge, MA: Harvard University Press.
35. Marsh, P. (1982). The choice between equity and debt: An empirical study. The Journal of Finance, 37(1), 121-144.
36. Mitchell, M., Mulherin, H. (1996). The impact of industry shocks on takeover and restructuring activity. Journal of Financial Economics 41, 193-230.
37. Mittoo, U. R., Zhang, Z. (2008). The capital structure of multinational corporations: Canadian versus US evidence. Journal of Corporate Finance, 14(5), 706-720.
38. Moatti, V., Ren, C. R., Anand, J., Dussauge, P. (2015). Disentangling the performance effects of efficiency and bargaining power in horizontal growth strategies: An empirical investigation in the global retail industry. Strategic Management Journal, 36(5), 745-757.
39. Modigliani, F., Miller, M. H. (1963). Corporate income taxes and the cost of capital: a correction. The American Economic Review, 53(3), 433-443.
40. Mueller, D. C. (1977). The effects of conglomerate mergers: A survey of the empirical evidence. Journal of Banking & Finance, 1(4), 315-347.
41. Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175.
42. Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 574-592.
43. Opler, T. C., Titman, S. (1994). Financial distress and corporate performance. The Journal of Finance, 49(3), 1015-1040.
44. Oztekin, O., Flannery, M. J. (2012). Institutional determinants of capital structure adjustment speeds. Journal of Financial Economics, 103(1), 88-112.
45. Qian, Y., Tian, Y., Wirjanto, T. S. (2009). Do Chinese publicly listed companies adjust their capital structure toward a target level?. China Economic Review, 20(4), 662-676.
46. Rajan, R. G., Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50(5), 1421-1460.
47. Ross, S. A. (1977). The determination of financial structure: the incentive-signalling approach. The Bell Journal of Economics, 23-40.
48. Schwartz, E., Aronson, J. R. (1967). Some surrogate evidence in support of the concept of optimal financial structure. The Journal of Finance, 22(1), 10-18.
49. Scott, J. H. (1977). On the theory of conglomerate mergers. The Journal of Finance, 32(4), 1235-1250.
50. Shyam-Sunder, L., Myers, S. C. (1999). Testing static tradeoff against pecking order models of capital structure. Journal of Financial Economics, 51(2), 219-244.
51. Smith, D. J., Chen, J., Anderson, H. D. (2015). The influence of firm financial position and industry characteristics on capital structure adjustment. Accounting & Finance, 55(4), 1135-1169.
52. Staikouras, S. K. (2006). Business opportunities and market realities in financial conglomerates. The Geneva Papers on Risk and Insurance-Issues and Practice, 31(1), 124-148.
53. Stoja, E., Tucker, J. (2007). Long and short-run capital structure dynamics in the UK-an industry level study. SSRN Electronic Journal. 10.2139/ssrn.1045101
54. Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics, 26(1), 3-27.
55. Taggart Jr, R. A. (1977). A model of corporate financing decisions. The Journal of Finance, 32(5), 1467-1484.
56. Titman, S. (1984). The effect of capital structure on a firm's liquidation decision. Journal of Financial Economics, 13(1), 137-151.
57. Titman, S., Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 43(1), 1-19.
58. Uysal, V. B. (2011). Deviation from the target capital structure and acquisition choices. Journal of Financial Economics, 102(3), 602-620.
59. Vermaelen, T., Xu, M. (2012). Acquisition finance, capital structure and market timing. Working Paper, Institut Europeen d'Administration (INSEAD), London School of Economics.
60. Warr, R. S., Elliott, W. B., Koeter-Kant, J., Oztekin, O. (2012). Equity mispricing and leverage adjustment costs. Journal of Financial and Quantitative Analysis, 47(3), 589-616.
61. Weston, J. F. (2001). Merger and Acquisitions as Adjustment Processes. Journal of Industry, Competition and Trade, 1(4), 395-410.
62. Yang, T. (2011). The adjustment of capital structure in mergers and acquisitions: a revisit of the optimal capital structure. Working Paper. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.557.477&rep=rep1&type=pdf
63. Zhou, Q., Tan, K. J. K., Faff, R., Zhu, Y. (2016). Deviation from target capital structure, cost of equity and speed of adjustment. Journal of Corporate Finance, 39, 99-120.