تغییرات اهرم مالی در ارتباط با ادغام شرکت های بزرگ

We empirically examine whether firms increase financial leverage following mergers. Firms could increase financial leverage either because of an increase in debt capacity or because of unused debt capacity from pre-merger years. We find that financial leverage of combined firms increases significantly following mergers. A cross-sectional analysis shows that the change in financial leverage around mergers is significantly positively correlated with the announcement period market-adjusted returns. Further tests indicate that the increase in financial leverage is an outcome of an increase in debt capacity, although there is weak evidence that some of the increase in financial leverage is a result of past unused debt capacity.

This paper empirically examines whether merging firms increase their financial leverage following mergers. An increase in financial leverage could arise due to two potential reasons which are not mutually exclusive: (1) an increase in debt capacity, and (2) unused debt capacity of target and acquiring firms from pre-merger years. Lewellen (1971) postulates that merged firms can increase their financial leverage without increasing the pre-merger level of riskiness because of an increase in debt capacity that results from mergers. An increase in financial leverage benefits shareholders of merging firms through the tax deductibility of interest payments on corporate debt. An increase in leverage following mergers might also enhance shareholder wealth through an expropriation of wealth from bondholders. An immediate consequence of a higher debt capacity following mergers is the co-insurance effect — existing bondholders are better off because debt becomes relatively safer. Shareholders can appropriate part or all of the benefits from bondholders by financing the merger with debt and increasing financial leverage of the merged firm (see Kim and McConnell, 1977 and Shastri, 1990 for details).1 Existing evidence on changes in financial leverage or the associated tax motivation for mergers is inconclusive. While Auerbach (1988) concludes that tax factors were not a major force driving the takeover activity of the 1970s, Hayn (1989) finds some evidence of tax benefits from mergers. Although a detailed analysis of changes in financial leverage and the benefits from higher leverage in the context of mergers is not available, studies other than mergers provide evidence supporting the tax-based theories of financial leverage (see Givoly et al., 1992 and Mackie-Mason, 1990). A more powerful test of an increase in debt capacity hypothesis is to cross-sectionally correlate wealth gains to shareholders of merging firms with changes in financial leverage around mergers. If the present value of future benefits from expected increases in leverage are capitalized at the time of the merger announcement, we expect a positive correlation between announcement period market-adjusted returns and changes in financial leverage around mergers. While the evidence of positive market-adjusted returns may be consistent with many alternative explanations, a cross-sectional analysis provides direct evidence of benefits from financial leverage. We control for several other explanations by including additional control variables.2 Merging firms might also be able to increase financial leverage following mergers because target and acquiring firms have unused debt capacity from pre-merger years. We examine whether target or acquiring firms have unused debt capacity using two different benchmarks. First, we model financial leverage and then take the difference between firms' actual leverage and expected leverage to capture any unused debt capacity from pre-merger years. We also compare the pre-merger financial leverage of target and acquiring firms with those of matched firms as second measure of debt capacity. Our empirical analysis provides evidence in support of the theory that an increase in financial leverage results from an increase in debt capacity. The results show that the mean (median) financial leverage, defined as the ratio of book value of total debt to the total value of the firm, increases significantly for the combined firm from 32.9% (30.7%) 1 year prior to the merger to 38.4% (36.6%) 1 year after the merger. That is, the mean (median) financial leverage increases by about 17% (19%) compared to the pre-merger financial leverage of the combined firm. The increased leverage is maintained for all the 5 post-merger years that we examine suggesting that the change in leverage is permanent rather than temporary. Since financial leverage does not decline after the merger, our results do not seem to support the predictions of Chowdhry and Nanda (1993) that debt is used strategically in mergers to deter entry and acquire target firms at a bargain price. Cross-sectional regressions indicate an economically and statistically significant positive association between the weighted average market-adjusted returns of the target and acquiring firms around the announcement date and changes in financial leverage after controlling for possible benefits from potential wealth expropriation, pre-merger unused debt capacity, and other tax and non-tax reasons for mergers. We conclude that increases in leverage following mergers are associated with increases in debt capacity. Since the argument of increased debt capacity is directly related to the merging firms' earnings correlation, we examine if changes in leverage around mergers are associated with the correlation between the pre-merger earnings streams of target and acquiring firms. Although the sign of the association is negative as predicted by the increasing debt capacity hypothesis, the results are statistically insignificant. Since earnings correlation is noisy, we use variations of the size variable to proxy for debt capacity. Presumably, the increase in debt capacity is likely to be higher when merging firms are similar in size and are large. The results are consistent with the expectations when we regress changes in leverage on these variables that are variations of the size variable. We also find some weak evidence of unused debt capacity from pre-merger years. Our results indicate that target and acquiring firms are under-levered when we estimate a model of debt capacity using a number of explanatory variables and compare the firms' actual financial leverage with the predicted values. However, we find no evidence of unused debt capacity when size and industry are used as a proxy for a firm's debt capacity. Moreover, we find no evidence that the capital market incorporates benefits from unused debt capacity at the time of the merger announcement. Overall, our findings indicate that the increase in financial leverage results from an increase in debt capacity, although there is weak evidence that the increase also comes from unused debt capacity. The rest of the paper is organized as follows. Section 2 motivates the argument for examining financial leverage changes associated with mergers. Section 3 describes the sample and presents summary statistics. Section 4 reports the results on changes in financial leverage and interest expense. Section 5 reports the results related to some of the other motives for mergers. Section 6 presents a cross-sectional analysis of the announcement period market-adjusted returns, and Section 7 concludes the paper.

We provide strong empirical evidence of a statistically and economically significant increase in financial leverage of combined firms following mergers. Moreover, we examine whether the increase in financial leverage results from an increase in debt capacity. If firm size and industry are surrogates for firms' debt capacity, then the optimal financial leverage of the target and acquiring firm will be given by a “typical” firm that represents the industries of the two merging firms and is close to their combined firm size. Consistent with an increase in debt capacity hypothesis, we find that the industry- and size-adjusted financial leverage increases significantly from −5.8% in year −1 to 2.4% in year +1. A negative number for year −1 does not reflect unused debt capacity from pre-merger years, rather it indicates the increase in debt capacity that target and acquiring firms can achieve by combining together. Moreover, since the financial leverage of merged firms is statistically indistinguishable from those of matched firms for post-merger years, it appears that merged firms fully utilize the increase in debt capacity by taking on more debt. It is possible that the increase in financial leverage is the result of exhausting unused debt capacity from pre-merger years, rather than an increase in debt capacity. We find some weak evidence of unused debt capacity from pre-merger years when we estimate debt capacity based on a model that uses a number of explanatory variables. However, we consider this as weak evidence of unused debt capacity because there is no evidence of unused debt capacity when we use industry and size matched firms as benchmarks. Moreover, unused debt capacity is not correlated with wealth gains around merger announcements. A more powerful test of the increasing debt capacity hypothesis is to correlate the merger-related stock market performance with the change in financial leverage. In the cross-sectional analysis, we control for the expropriation of wealth from bondholders, the two potential sources of tax benefits (step-up and unused NOL and/or ITC), pre-merger unused debt capacity of acquiring and target firms, change in operating performance of the merged firm, the method of payment used in mergers, and target firms' market-based performance that have been previously examined and documented as important. The cross-sectional analysis shows that the announcement period market-adjusted returns are positively related to increases in financial leverage following mergers. The results support the argument that the stock market incorporates future benefits from anticipated financial leverage increases around the announcement date. Our results are consistent with many models Harris and Raviv, 1991 and Masulis, 1988 where the stock price is expected to increase following the announcement of leverage-increasing capital structure changes. It appears that a merger announcement can also be interpreted as an indirect leverage-increasing announcement. What distinguishes a merger from other leverage-increasing methods is an interesting area for further exploration. Many other corporate restructuring announcements (such as divestitures, spin-offs, etc.) are known to be associated with wealth effects. However, the link between these announcements and capital structure changes are not known and can be studied in a framework similar to the one used above. Similarly, change in capital structure and its link to manager's equity ownership (Harris and Raviv, 1988) may also be examined in a more elaborate study. We expect that our study will provide a useful step in understanding capital structure changes and myriad corporate announcements affecting stock returns