Isil Erel is with Ohio State University, Yeejin Jang is with Purdue University, and Michael S. Weisbach is with Ohio State University, NBER, and SIFR. Isil Erel and Michael Weisbach are Fellows of the National Center for the Middle Market at the Fisher College of Business, Ohio State University, and acknowledge the Center's support for this research. We thank Heitor Almeida, Bo Becker, Murillo Campello, Panagiotis Dontis Charitos, Serdar Dinc, Mara Faccio, Joan Farre-Mensa, Antonio Galvao, Shan Ge, Cam Harvey, Jerry Hoberg, Byoung-Hyoun Hwang, Andrew Karolyi, Sandy Klasa, David McLean, Berk Sensoy, René Stulz, Tracy Wang, Jun Yang, two referees, an Associate Editor, as well as seminar participants at Amsterdam, Boston College, Brandeis, Cornell, Michigan, Minnesota, Nanyang Technical University, National University of Singapore, Northeastern, Ohio State, Singapore Management University, Purdue, European Winter Finance Summit 2013, UBC Winter Finance Conference, FIRS 2013 Conference, and the 2013 Multinational Finance Society Conference for helpful suggestions. We received excellent research assistance from Jongsik Park.
Do Acquisitions Relieve Target Firms’ Financial Constraints?
Article first published online: 19 JAN 2015
© 2015 the American Finance Association
The Journal of Finance
Volume 70, Issue 1, pages 289–328, February 2015
How to Cite
EREL, I., JANG, Y. and WEISBACH, M. S. (2015), Do Acquisitions Relieve Target Firms’ Financial Constraints?. The Journal of Finance, 70: 289–328. doi: 10.1111/jofi.12155
- Issue published online: 19 JAN 2015
- Article first published online: 19 JAN 2015
- Accepted manuscript online: 27 MAR 2014 01:50PM EST
- Manuscript Accepted: 17 DEC 2013
- Manuscript Received: 7 MAY 2012
Managers often claim that target firms are financially constrained prior to being acquired and that these constraints are eased following the acquisition. Using a large sample of European acquisitions, we document that the level of cash that target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline, while investment increases following the acquisition. These effects are stronger in deals that are more likely to be associated with financing improvements. Our findings suggest that acquisitions relieve financial frictions in target firms, especially when the target firm is relatively small.