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CFE-1: Boundaries of the Firm
Why Do Distressed Firms Acquire?
Erasmus University Rotterdam
Acquisitions made by distressed firms in recent years are economically important. This paper explores the rationale behind such acquisitions using a natural experiment. Exploiting a recent tax change which reduces debt restructuring costs for certain creditors and decreases bankruptcy risk, I identify the causal link between financial distress and acquisitions. Upon an exogenous reduction in the probability of bankruptcy, distressed firms react by cutting 34% of cash spending on acquisitions. Moreover, distressed firms refocus by decreasing 75% of the transaction value of diversifying acquisitions and doubling divestitures. The evidence supports the financial synergy hypothesis that distressed firms acquire to diversify cash flow risk, rather than the growth opportunity hypothesis that distressed firms acquire to capture external growth opportunities and revive growth. These findings indicate a new effect of financial distress on investment decisions. When firms are under pressure to meet debt obligations, it creates an incentive for firms to diversify via acquisitions.
Search Frictions and M&A Outcomes: Theory and Evidence
1York University; 2Boston University
This paper performs empirical tests of the search theory of mergers and acquisitions. To derive testable cross-sectional implications, we build a simple search model of mergers. The model
identifies three determinants of search frictions that influence merger pairings and complementarity gains in observed mergers: target's obsolescence risk, the likelihood of target's discovery by potential acquirers, and the extent of competitive interaction among potential bidders in output markets. Our empirical results, obtained using product-based and technology-based measures of merger complementarity, are consistent with the model's predictions and support the search theory of mergers.
Acquiring Banking Networks
1UC Berkeley; 2University of Hong Kong
Does the pre-deal geographic overlap of an acquirer and target banks’ network of subsidiaries and branches affect post-acquisition value creation and synergies? To address this question, we compile comprehensive information on U.S. bank mergers and acquisitions from 1986 through 2014, construct several measures of network overlap, and design and implement a new identification strategy. We find that pre-deal network overlap (1) is positively associated with the likelihood that two banks merge, (2) materially boosts the cumulative abnormal returns of the acquirer, target, and combined banks, i.e., pre-deal overlap boosts post-deal value creation, and (3) this value creation is associated with cost reductions, managerial changes, loan quality improvements, and revenue increases at target banks.
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Conference: EFA 2017
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