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Do Acquisitions Relieve Target Firms’ Financial Constraints?
Author(s) -
EREL ISIL,
JANG YEEJIN,
WEISBACH MICHAEL S.
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12155
Subject(s) - cash flow , business , finance , investment (military) , cash , sample (material) , monetary economics , economics , chemistry , chromatography , politics , political science , law
ABSTRACT 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.