Essays on mergers and acquisitions

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Uysal, Vahap Bülent

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The question of whether M&A pays off has attracted considerable attention from researchers. I explore two important factors in M&A: bidder’s excess debt capacity and asymmetric information. First, I examine how leverage affects bidding behavior. This is an issue that has generated considerable interest – my departure from the existing literature is that I consider how takeover activity is influenced by the acquiring firms’ deviation from their target capital structures. I find that bidders which are underleveraged relative to their target debt ratios pay higher premiums than other bidders, and are more likely to successfully acquire targets. Consistent with the free cash hypothesis, stock prices react more unfavorably to takeover announcements of underleveraged bidders. In addition, leverage deficit subsumes effects of leverage and excess cash reserves which have been shown to be important determinants of bidding behavior and stock price reactions. Second, I empirically study the role of asymmetric information in takeover contests. A large body of work suggests that better informed bidders have advantages in takeover contests. However, testing these theories is quiet difficult, as the informational advantage of bidders is typically unobservable. The novel approach I take in this paper is to use geographical proximity between a bidder and a target. I find that (i) stock prices react more favorably to takeover announcements of local bidders; (ii) target shareholders of local bidders receive lower premiums; and (iii) locally merged firms show superior operating performance in the long run. These findings are consistent with the idea that there is less asymmetric information between geographically proximate bidders and targets.