Leverage and the Complexity of Takeovers

Posted: 9 Nov 2004

See all articles by Tomas Jandik

Tomas Jandik

University of Arkansas - Sam M. Walton College of Business

Anil K. Makhija

Ohio State University (OSU) - Department of Finance

Abstract

There is scant empirical evidence on how the leverage of target firms affects gains to their shareholders, although there are several widely-cited economic theories offered in the literature. The limited available evidence shows that shareholders of targets with greater leverage experience higher returns. However, even this observed effect of debt on takeovers can not be distinguished from a mere mechanical pure leveraging effect, leaving the economic explanations untested. Consequently, we adopt an alternative approach here to examine if targets' debt truly matters in takeovers. We report that acquisition processes involving targets with higher leverage tend to be significantly more complex in several ways. We find that such acquisitions tend to take a longer time to consume, are more likely to be associated with multiple bidder auctions, and experience greater revisions in offer prices. Finally, we find that factors that make takeovers more complex also lead to greater target gains.

Keywords: Target's leverage, target returns, takeover complexity

JEL Classification: G32, G34

Suggested Citation

Jandik, Tomas and Makhija, Anil K., Leverage and the Complexity of Takeovers. Available at SSRN: https://ssrn.com/abstract=616342

Tomas Jandik (Contact Author)

University of Arkansas - Sam M. Walton College of Business ( email )

WCOB 302
Fayetteville, AR 72701
United States
479-575-6147 (Phone)

Anil K. Makhija

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-1899 (Phone)

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