Debt, Debt Structure and Corporate Performance after Unsuccessful Takeovers: Evidence from Targets that Remain Independent

Charles A. Dice Center Working Paper No. 2005-6

46 Pages Posted: 30 Mar 2005

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

Date Written: December 22, 2004

Abstract

Significant increases in the level of target leverage have been previously documented, following unsuccessful takeover attempts. This increased leverage may signal managerial commitment to improved performance, suggesting that corporate performance and leverage should be positively related. If, however, the increased leverage leads to further managerial entrenchment, then corporate performance and leverage should be negatively related. In this paper, we reexamine both motivations for the observed increase in leverage. Furthermore, we argue that changes in the composition of debt are also important, besides changes in the level of leverage. In particular, bank debt has frequently been assigned a proactive, beneficial monitoring role in the literature. Besides confirming the increase in the level of leverage, we also document increases in bank debt surrounding cancelled takeovers. As a result, we find a more complex relation between corporate performance and debt use: Overall, the relation between corporate performance and leverage is negative, as predicted by a dominant entrenchment effect. However, increases in bank debt reduce the adverse effect of the increase in the level of leverage.

Keywords: Unsuccessful bids, corporate performance, level and structure of debt

JEL Classification: G32, G34

Suggested Citation

Jandik, Tomas and Makhija, Anil K., Debt, Debt Structure and Corporate Performance after Unsuccessful Takeovers: Evidence from Targets that Remain Independent (December 22, 2004). Charles A. Dice Center Working Paper No. 2005-6, Available at SSRN: https://ssrn.com/abstract=679031 or http://dx.doi.org/10.2139/ssrn.679031

Tomas Jandik

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

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

Anil K. Makhija (Contact Author)

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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