| Abstract: |
Managers often claim that an important source of value in acquisitions is the
acquiring firm’s ability to finance investments for the target firm. This
claim implies that targets are financially constrained prior to being acquired
and that these constraints are eased following the acquisition. We evaluate
these predictions on a sample of 5,187 European acquisitions occurring between
2001 and 2008, for which we can observe the target’s financial policies both
before and after the acquisition. We examine whether target firms’
post-acquisition financial policies reflect improved access to capital. We
find that the level of cash target firms hold, the sensitivity of cash to cash
flow, and the sensitivity of investment to cash flow all decline
significantly, while investment significantly increases following the
acquisition. These effects are stronger in deals that are more likely to be
associated with financing improvements. These findings are consistent with the
view that acquisitions ease financial frictions in target firms. |