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