Credit supply, post-acquisition performance and financial constraints

ABSTRACT

We study the effect of credit supply on the acquisition behaviour of financially constrained (FC) and financially unconstrained (UC) firms. FC firms are likely to conduct acquisitions when credit supply is greater while UC firms can conduct acquisitions whenever a good opportunity arises. We argue that the flexibility unconstrained firms have is valuable. Our empirical results indicate that UC firms outperform FC firms up to 36 months after the acquisition. We also find that increased credit supply increases the probability of conducting mergers and acquisitions (M&As) for FC firms while it has less impact on M&A behaviour of UC firms.

KEYWORDS:

• Mergers and acquisitions
• financial constraints
• financial flexibility
• post-acquisition performance

JEL CLASSIFICATION:

• G30
• G32
• G34

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See Rhodes-Kropf, Robinson, and Viswanathan (2005) for an in-depth discussion concerning the measure.

² The 4 variable and 5 variable index do not differ dramatically, since Q is almost orthogonal to the other variables in the index. See discussion in Baker, Stein, and Wurgler (2003, p. 985).

³ Results do not differ if we use a contemporaneous KZ index.

⁴ http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

⁵ In this setting, we do not explicitly control for Q and can therefore use the KZ index proposed by Kaplan and Zingales (1997).