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Debt covenants and asset versus equity acquisitions

Debt covenants and asset versus equity acquisitions
Debt covenants and asset versus equity acquisitions
We examine whether the presence of loan covenants leads firms to choose either asset or equity acquisitions. Asset acquisitions involve the selective purchase of a target company's assets, and equity acquisitions involve acquisitions of common stocks. We document that firms with loan covenants are more likely to engage in asset acquisitions as opposed to equity acquisitions. Our results are robust to alternative measures of loan covenants and to endogeneity concerns. Furthermore, the association between loan covenants and asset acquisitions is stronger among firms with greater debt covenant intensity, more severe agency problems, and lower profitability. Acquirers facing more intense competition within their industries are also likely to choose asset acquisitions. Our findings suggest that acquirers' incentives to avoid wealth transfer at the expense of debtholders drive the relation between debt covenants and choice of acquisition structure.
Acquisitions of assets, Acquisitions of equity, Debt covenants
1475-6803
145-177
Jory, Surendranath Rakesh
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh
852ea7b9-fd74-4a39-9281-87626e50886b
Nguyen, Ca
ba28d6bf-5552-489c-9986-1c8cb57f3094
Jory, Surendranath Rakesh
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh
852ea7b9-fd74-4a39-9281-87626e50886b
Nguyen, Ca
ba28d6bf-5552-489c-9986-1c8cb57f3094

Jory, Surendranath Rakesh, Ngo, Thanh and Nguyen, Ca (2021) Debt covenants and asset versus equity acquisitions. Journal of Financial Research, 44 (1), 145-177. (doi:10.1111/jfir.12237).

Record type: Article

Abstract

We examine whether the presence of loan covenants leads firms to choose either asset or equity acquisitions. Asset acquisitions involve the selective purchase of a target company's assets, and equity acquisitions involve acquisitions of common stocks. We document that firms with loan covenants are more likely to engage in asset acquisitions as opposed to equity acquisitions. Our results are robust to alternative measures of loan covenants and to endogeneity concerns. Furthermore, the association between loan covenants and asset acquisitions is stronger among firms with greater debt covenant intensity, more severe agency problems, and lower profitability. Acquirers facing more intense competition within their industries are also likely to choose asset acquisitions. Our findings suggest that acquirers' incentives to avoid wealth transfer at the expense of debtholders drive the relation between debt covenants and choice of acquisition structure.

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Jory_Ngo_Nguyen_20201221 - Accepted Manuscript
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Accepted/In Press date: 12 January 2021
e-pub ahead of print date: 12 January 2021
Keywords: Acquisitions of assets, Acquisitions of equity, Debt covenants

Identifiers

Local EPrints ID: 446241
URI: http://eprints.soton.ac.uk/id/eprint/446241
ISSN: 1475-6803
PURE UUID: c53ae436-f941-4d4c-a90c-7b075a395d16
ORCID for Surendranath Rakesh Jory: ORCID iD orcid.org/0000-0002-8265-0001

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Date deposited: 29 Jan 2021 17:37
Last modified: 28 Apr 2022 02:08

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Contributors

Author: Thanh Ngo
Author: Ca Nguyen

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