The Use of Excess Cash and Debt Capacity as a Motive for Merger

This study explores the hypothesis that capital structure change provides bidders and targets a motive for merger. After a brief review of theories that would support the hypothesis, the paper reports results of tests on (1) leverage in bidder and target firms, and (2) change in shareholder wealth a...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 1988-06, Vol.23 (2), p.199-217
Main Author: Bruner, Robert F.
Format: Article
Language:English
Subjects:
Acquisitions & mergers
Bidders
Bids
Capital structure
Cash
Changes
Debt capacity
Equity
Financial investments
Financial leverage
Hypotheses
Incentives
Market value
Mathematical analysis
Quantitative analysis
Ratios
Shareholders
Statistical analysis
Studies
Target company
Theory
Citations: Items that cite this one
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Summary:This study explores the hypothesis that capital structure change provides bidders and targets a motive for merger. After a brief review of theories that would support the hypothesis, the paper reports results of tests on (1) leverage in bidder and target firms, and (2) change in shareholder wealth associated with change in leverage. The findings support the theory of Myers and Majluf that “slack-rich” bidders pair with “slack-poor” targets to create value. These results are contrary to other studies, which find highly levered bidders.
ISSN:0022-1090
1756-6916
DOI:10.2307/2330881