Effect of leverage deviation on choices and outcomes of public versus non-public acquisitions

This paper examines whether firms' deviation from target leverage may predict types and outcomes of mergers and acquisitions (M&A) deals. We find that over-levered firms are more inclined to be involved in public acquisitions than non-public acquisitions. Consistent with the proposition of information economics theory, our findings suggest that information asymmetry is the main motive behind over-levered firms' preference for public targets. Specifically, we observe that over-levered acquirers not only prefer public targets, but also pick those with less information asymmetry. We find that, in the short term, the market reacts negatively to the announcement of public acquisitions by over-levered firms. However, in the long term these acquirers experience better operating synergies and values, measured by changes in return on assets and Tobin's q, respectively. Our results are robust after controlling for M&A deals-, firm-, industry-characteristics and endogeneity concerns using both propensity score matching and Heckman two stage methods. Overall, our findings support the premises of agency theory and Uysal, Journal of Financial Economics (2011), 102, 602–620 view that over-levered firms have a high tendency to pursue most value-enhancing acquisition deals due to the high pressure of holding high levels of debt.