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. While the evidence does not speak to whether easing of financial frictions is a pervasive motive for acquisitions, it is consistent with the view that acquisitions ease financial frictions in target firms, especially when the target firm is relatively small.

Do Acquisitions Relieve Target Firms' Financial Constraints?

https://research.birmingham.ac.uk/portal/files/48179654/Yang_et_al_To_what_extent_corporate_liquidity_JCF.pdf

To what extent does corporate liquidity affect M&A decisions, method of payment and performance? Evidence from China

Alleviating the misallocation of R&D inputs in China's manufacturing sector: From the perspectives of factor-biased technological innovation and substitution elasticity

CEO political preference and credit ratings

Implicit government guarantees and credit ratings

Using a large sample of US acquisitions made between 1985 and 2013, we study the effect of financial constraints on acquisition gains and acquisition likelihood. Our findings show that financial constraints of target companies significantly increase acquisition premiums and abnormal returns for both parties. Our results further show that the presence of financial constraints in the target is one of the most important determinants of a takeover bid. This supports the idea that acquisitions may improve the ability of financially constrained companies to access capital through a better reallocation of resources within segments of the same company (e.g., internal capital market) or through better access to external markets. This would eventually benefit bidders too, as new capital would be invested in valuable growth opportunities that otherwise would expire unexercised.

/pdf/corporate-acquisitions-and-financial-constraints-330hy3ewff.pdf

Corporate Acquisitions and Financial Constraints

Using a sample of U.S. initial public offerings (IPOs), we show that personal connections between directors and top executives of issuers and those of underwriting banks result in significantly lower levels of IPO underpricing. We estimate the average effect to be about 12 percentage points. The results hold with several alternative robustness tests including non-random choice of underwriter, additional controls for managerial traits, matching exercises and doubly robust estimation. Our results indicate that the effect of connections is significantly stronger for companies that are more likely to suffer from asymmetric information problems. This corroborates the idea that the lower level of underpricing for connected companies reflects better flow of information with the underwriter.

The Effect of ‘Underwriter–Issuer’ Personal Connections on IPO Underpricing

Using a large sample of US public debt issues we show that personal connections between directors of issuing companies and rating agencies result in higher credit ratings. We estimate the average effect to be about one notch. Moreover, our tests indicate that issues by connected firms are 30% more likely to be rated A3. Results are robust to several alternative tests including additional controls for managerial traits, firm fixed effects, and propensity score matching. Furthermore, our tests on default rates and bond yields suggest that personal connections act as a mechanism to reduce asymmetric information between the rating agency and the issuer.

/pdf/rating-friends-the-effect-of-personal-connections-on-credit-1v4xllfm2g.pdf

Rating Friends: The Effect of Personal Connections on Credit Ratings

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Corporate Acquisitions and Financial Constraints

The Effect of ‘Underwriter–Issuer’ Personal Connections on IPO Underpricing

Rating Friends: The Effect of Personal Connections on Credit Ratings