Abstract
While capital structure is believed to be stable, recent literature documents significant instability of leverage ratios in the life of a company. We examine the leverage ratios of the acquirer and target before and after an acquisition, where the post-acquisition target firm is a separate entity.
Our results show that acquisitions cause a significant increase in the leverage of acquiring firms which remains elevated in subsequent years. However, the acquisitions are found to have no effect on the leverage of targets.
We hypothesize that the controlling company must have had motives for its own capital structure, without changing the capital structure of the target. The acquirer could be interested in enhancing performance through additional leverage for its own company without increasing its riskiness, which is offset by not changing the leverage of the target, and thereby maintains the merger risk diversification motives.