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Easing financing and M&A investment constraints: the role of corporate industrial diversification

Easing financing and M&A investment constraints: the role of corporate industrial diversification
Easing financing and M&A investment constraints: the role of corporate industrial diversification
Based on a sample of 10,951 mergers and acquisitions (M&As), this article examines how corporate industrial diversification could ease, or even eliminate firms’ financing and investment constraints, as measured by the link between borrowing ability and M&A acquisition likelihood. Drawing from the trade-off theory of capital structure, the paper argues and finds that firms that borrow beyond their target leverage ratios do face significant investment constraints in the form of a reduced ability to initiate and complete M&As. Furthermore, consistent with the co-insurance hypothesis, the paper shows that the financing and investment constraints are reduced when firms undertake diversifying acquisitions than when they pursue related acquisitions. Overall, the findings improve our understanding of how the perceived risks/benefits associated with planned investments do influence the ex-ante financing and investment constraints faced by firms.
1529-7373
277-290
Agyei-Boapeah, Henry
37005f29-d453-458e-b6b5-cd92e55587a4
Agyei-Boapeah, Henry
37005f29-d453-458e-b6b5-cd92e55587a4

Agyei-Boapeah, Henry (2017) Easing financing and M&A investment constraints: the role of corporate industrial diversification. Annals of Economics and Finance, 18 (2), 277-290.

Record type: Article

Abstract

Based on a sample of 10,951 mergers and acquisitions (M&As), this article examines how corporate industrial diversification could ease, or even eliminate firms’ financing and investment constraints, as measured by the link between borrowing ability and M&A acquisition likelihood. Drawing from the trade-off theory of capital structure, the paper argues and finds that firms that borrow beyond their target leverage ratios do face significant investment constraints in the form of a reduced ability to initiate and complete M&As. Furthermore, consistent with the co-insurance hypothesis, the paper shows that the financing and investment constraints are reduced when firms undertake diversifying acquisitions than when they pursue related acquisitions. Overall, the findings improve our understanding of how the perceived risks/benefits associated with planned investments do influence the ex-ante financing and investment constraints faced by firms.

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Published date: 1 November 2017

Identifiers

Local EPrints ID: 434316
URI: http://eprints.soton.ac.uk/id/eprint/434316
ISSN: 1529-7373
PURE UUID: 864cd33b-cbd1-4c55-902a-cd04f2e98144
ORCID for Henry Agyei-Boapeah: ORCID iD orcid.org/0000-0003-4798-6324

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Date deposited: 19 Sep 2019 16:30
Last modified: 17 Oct 2019 00:20

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