Managers claim that an important source of value in acquisitions is the acquiring firm’s ability to finance investments for the target firm. Isil Erel, Yeejin Jang and Michael S Weisbach evaluate if target firms’ post-acquisition financial policies reflect improved access to capital. By looking at a sample of 5,187 European deals from 2001 to 2008, they find a significant fall in the level of cash target firms hold and the sensitivity of cash and investment to cash flow, while investment increases. This acts as a motivating factor and with reduction in financial constraints it could even induce managers to take value-decreasing acquisitions.

 

Title: Do acquisitions relieve target firms’ financial constraints

Source: Social Science Research Network