Leverage changes and growth options in mergers and acquisitions

Agliardi, Elettra, Amel-Zadeh, Amir and Koussis, Nicos (2016) Leverage changes and growth options in mergers and acquisitions. Journal of Empirical Finance, 37. pp. 37-58.


We develop and empirically test a trade-off model for the analysis of leverage changes in mergers and acquisitions. This study extends prior findings of a post-merger increase in leverage for the acquiring firm by linking this leverage increase to merging firms that are less correlated, create significantly larger growth options, have lower bankruptcy costs and lower volatility. Specifically, we show that acquiring firms are more likely to finance diversifying acquisitions with debt as equity holders exploit the increased debt capacity with higher leverage resulting in total merger gains that are positively associated with financial synergies. This study further corroborates recent theoretical evidence of a U-shaped relationship between growth options and leverage theoretically and empirically in the context of mergers.

Item Type: Article
Keywords: accounting, finance, capital structure, mergers and acquisitions (M&A), growth options, dynamic trade-off model
Subject(s): Accounting
Date Deposited: 15 Aug 2016 09:38
Last Modified: 19 Feb 2018 11:14
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6200

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