CHANGES IN CAPITAL STRUCTURE: ASSET CHARACTERISTICS OR MANAGERIAL PREFERENCES

Authors


  • We are grateful to David Mauer (associate editor) and Cathy Cao (reviewer) for helpful comments and suggestions. We also thank David Becher, Kenneth Borokhovich, Sebastian Ernst, Mine Ertugrul, Aslihan G. Korkmaz-Cicek, Spenser Robinson, as well as participants at the 2010 Eastern Finance Association meeting, 2011 Midwestern Finance Association meeting, 2012 Financial Management Association European meeting, and Cleveland State University seminar. All remaining errors are our own.

Abstract

We examine leverage changes around mergers by similar-size firms. If asset characteristics drive leverage, both acquirer and target premerger leverage should predict long-term postmerger leverage. We find that only acquirer premerger leverage has a long-term effect. The effect of target premerger leverage, while highly significant right after the merger, disappears after two years. These findings cannot be explained by suboptimal premerger leverage of targets, sales of target assets, or corporate governance characteristics. As acquirer managers usually manage the merged firm, our findings support the hypothesis that managerial preferences have a strong effect on firm leverage.

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