Mergers and acquisitions and corporate financial leverage

331 Pages·2017·1.86 MB·English

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Mergers and acquisitions
and corporate financial
leverage - an empirical
analysis of UK firms
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• A Doctoral Thesis. Submitted in partial fulfilment of the requirements
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Mergers and Acquisitions and Corporate Financial
Leverage – An Empirical Analysis of
UK Firms

By
Henry Agyei-Boapeah

Doctoral Thesis
Submitted in partial fulfilment of the requirements for the award of
Doctor of Philosophy of Loughborough University

March, 2013

© By Henry Agyei-Boapeah (2013)
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Title: Mergers and Acquisitions and Corporate Financial Leverage – An Empirical Analysis of UK
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Abstract
This thesis examines the link between mergers and acquisitions (M&As) and corporate
financial leverage. The thesis proposes and tests various hypotheses regarding: (1) the
relationship between the probability of firms undertaking M&As and corporate financial
leverage; and (2) the changes in financial leverage prior to firms decision to initiate M&As.
The empirical evidence on the proposed hypotheses is based on a large sample of firms in the
UK during the period 1996 and 2006. The empirical analysis presented in this study
contributes to the large and growing body of literature on the interdependence of corporate
financing and investment decisions. Specifically, this study contributes to the literature in two
ways.

First, the thesis investigates the link between firms‟ leverage deviations (i.e. the deviations of
firms‟ observed leverage ratios from target leverage ratios) and the probability of undertaking
M&As in the future. Building upon the earlier literature, it is argued that extreme leverage
deviations lower the probability of undertaking M&As by impairing firms‟ ability to raise
capital to finance these deals. The study‟s empirical analyses suggest that extremely
overleveraged firms have lower probability of undertaking M&As. Moreover, the link
between extreme overleverage and the probability of undertaking M&As is weaker for
diversification-increasing acquisitions (i.e. deals in which the acquirer and the target firm
operate in different industries); for domestic acquisitions (i.e. deals in which the acquirer and
the target firm are domiciled in the same country); and for focused (i.e. single-segment) firms
undertaking acquisitions. Thus, the leverage deviation effect is not symmetric for all types of
acquisitions and for all firms. Second, the thesis examines how the pre-acquisition changes in
corporate financial leverage may be influenced by: (1) the extent to which firms deviate from
their target leverage ratios; and (2) firms‟ intentions to initiate M&As. Key empirical findings
in this section suggest that firms that have higher leverage deviations adjust their leverage at
a higher rate than those with lower deviations. More importantly, the empirical evidence
suggests that firms that undertake M&As adjust their pre-acquisition leverage at a higher rate
than those that do not. These findings suggest that, when making adjustments to corporate
capital structure, managers tend to consider their firms‟ leverage deviations and their future
acquisition plans. Furthermore, the study‟s findings partly explain the differences in the
speeds of financial leverage adjustments reported in the existing literature.
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Acknowledgements
I am profoundly grateful to the Almighty God from whom I draw strength and inspiration. I
am also hugely indebted to the Business School of Loughborough University for its interest
in my development and financially sponsoring my Ph.D. study. My next thanks goes to my
father, Alexander Agyei-Boapeah, and my sisters, Sylivian Splendilum Agyei and Millicent
Adjei Ntriwaah, whose prayers, care, and moral support over the past years have been
invaluable.

My gratitude also goes to my supervisor, Dr. Ali Ataullah, for his dutiful supervision. The
accomplishment of this thesis would have been virtually impossible without his guidance and
support. Finally, I would like to express my gratitude to my friend, Deborah Osei, her mother,
Victoria Amankwa, and my church, the Church of Pentecost, for providing me with spiritual
and social support here in the UK while I was away from home.

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Dedication
This thesis is dedicated to my beloved mother, Leticia Yaa Serwaa Ohenebeng, of blessed
memory, in appreciation for all her love, care and sacrifice for my wellbeing, particularly for
tirelessly and unselfishly working herself out to raise funds to support my education from the
elementary through to the undergraduate level.

I also dedicate this thesis to my prospective wife and children for the additional joy and
fulfilment that they will bring to my life.

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