Estimates of Acquisitions’ Impact on Targets’ Financial

The Effect of Acquisitions on Investments of Target Firms

This table presents estimates of equations in which the dependent variables are gross invest- ment normalized by total assets. AFTER is a dummy variable that equals one (zero) for the years after (before) an acquisition. Definitions and sources of the other variables are provided in the Appendix. Target-firm and year fixed effects are included in all regressions. Standard errors are corrected for clustering of observations at the target-firm level and associated standard errors are in parentheses. The symbols ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.

(3) (4) Dependent Variable

Gross Investment/Total Assets AFTER

(0.004) (0.005) Ln(Total Assets)

Ln(Total Assets) 2 0.0006

(0.001) (0.002) Cash Flow/Total Assets

0.0218** (0.010) Ln(Number of Employees)

− 0.0203*** (0.007) Sales Growth

0.0308*** (0.005) Leverage

0.0232* (0.012) Private Credit/GDP

(0.010) (0.015) Market Cap/GDP

(0.008) (0.012) GDP Growth

as in Almeida, Campello, and Weisbach ( 2004 ), is often used by managers to justify acquisitions.

In Table V , we report estimates of equations predicting investment (nor- malized by assets) using specifications similar to those presented for cash in panel A of Table III . In each specification, the coefficient on the variable in- dicating if a firm-year is after the acquisition is positive, and is statistically significantly different from zero. In addition, the magnitude of the coefficient is economically large. The coefficients are between 0.0156 and 0.0201, imply- ing that investment increases by 1.5% to 2% of assets following the acquisi- tion. Since the mean investment-to-asset ratio is 6.4% and the median is 3.4%

309 during the year before the acquisition, these estimates suggest that the acqui-

Do Acquisitions Relieve Target Firms’ Financial Constraints?

sition increases the mean firm’s investment by 23% to 31% and the median firm’s by 44% to 59%.

The increase in the target’s investment following the acquisition is consistent with lower financial constraints leading to a lower cost of capital being applied to investment projects. However, it is also consistent with operational synergies improving investment opportunities. It is likely that both effects combine to explain the observed increase in investment following acquisitions.

If the increase in investment reflects reductions in constraints, as well as synergies, then the combined value of the acquirer and target should increase. The vast majority of our targets are private, so it is impossible to measure value changes for these firms. However, 36% of the acquirers are publicly traded, so we can measure the acquirer’s stock price reaction to these acquirers. For this subsample of deals with public acquirers the average abnormal stock price reaction is 1.5% for 3 days and 2.3% for 21 days around the merger announcement date, both of which are statistically significantly different from zero at the 1% level. This finding is consistent with the notion that value is created in these deals. It is also consistent with the view that acquirers can make acquisitions at a discount because of the private targets’ illiquidity or uncertainty about their valuation. (See Koeplin, Sarin, and Shapiro ( 2000 ) or Ellis et al. ( 2012 ) for more discussion of acquisitions of private companies.)