Deviation from the Target Capital Structure and Acquisition Choices

Research Article
Open access

Deviation from the Target Capital Structure and Acquisition Choices

Xinyu Deng 1*
  • 1 University of California—Berkeley    
  • *corresponding author xinyudeng@berkeley.edu
Published on 13 September 2023 | https://doi.org/10.54254/2754-1169/8/20230289
AEMPS Vol.8
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-915371-43-0
ISBN (Online): 978-1-915371-44-7

Abstract

This paper aims to discuss how managers consider capital structure variations when deciding which purchases to make. Compared to their debt ratio, highly leveraged companies are less likely to decide to buy cash. These companies purchase unimportant goals at a bargain. The capital structures of over-leveraged companies are changed by their managers in anticipation of a merger or acquisition. The methodology entails the approach to the research, and the right debt-to-capital ratio was found by using Compustat and the Center for Research on Security Prices (CRSP). These data will be used in assessing the estimation model and various regression and correlation analyses. Finally, they look for acquisitions that will add the most value. This research examines the relationship between capital structure and investment choices in the context of financial frictions, highlighting the importance of capital structure in investment choices.

Keywords:

capital structure, target capital structure, leverage ratio, debt capitalization

Deng,X. (2023). Deviation from the Target Capital Structure and Acquisition Choices. Advances in Economics, Management and Political Sciences,8,93-102.
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References

[1]. Leary MT, Roberts MR. Do firms rebalance their capital structures? The journal of finance. 60(6):2575-619. (2005).

[2]. Frank MZ, Goyal VK. Testing the pecking order theory of capital structure. Journal of financial economics. 67(2):217-48. (2003).

[3]. Hovakimian A, Hovakimian G, Tehranian H. Determinants of target capital structure: The case of dual debt and equity issues. Journal of financial economics. 71(3):517- 40. (2004).

[4]. Modigliani F, Miller MH. The cost of capital, corporation finance and the theory of investment. The American economic review. 48(3): 261-97. (1958).

[5]. Jensen MC. Agency costs of free cash flow, corporate finance, and takeovers. The American economic review. 76(2):323-9. (1986).

[6]. Ross SA. Capital structure and the cost of capital. Journal of Applied Finance (Formerly Financial Practice and Education) Journal of Applied Finance. 15(1). (2005).

[7]. Myers SC, Malouf NS. Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial economics. 13(2):187-221. (1984).

[8]. Baker M, Wurgler J. Market timing and capital structure. The journal of finance.57(1):1-32. (2002).

[9]. Graham JR, Harvey CR. The theory and practice of corporate finance: Evidence from the field. Journal of financial economics. 60(2-3):187-243. (2001).

[10]. Titman S, Wessels R. The determinants of capital structure choice. The Journal of finance. 43(1):1-9. (1988).

[11]. Rajan RG, Zingales L. What do we know about capital structure? Some evidence from international data. The journal of Finance. 50(5):1421-60. (1995).

[12]. Leary MT, Roberts MR. Do firms rebalance their capital structures? The journal of finance. 60(6):2575-619. (2005).

[13]. Kayhan A, Titman S. Firms’ histories and their capital structures. Journal of financial Economics. 83(1):1-32. (2007).

[14]. Vasiliou D, Daskalakis N. Institutional characteristics and capital structure: A cross-national comparison. Global Finance Journal. 19(3):286-306. (2009).

[15]. Uysal VB. Deviation from the target capital structure and acquisition choices. Journal of financial economics. 102(3):602-20. (2011).

[16]. Long MS, Malitz IB. Investment patterns and financial leverage. InCorporate capital structures in the United States. (pp. 325-352). University of Chicago Press. (1985)

[17]. De Crom F. Impact of capital structure choice on investment decisions. Bachelor Thesis Finance. (2011).

[18]. Byoun S. How and when do firms adjust their capital structures toward targets?. The Journal of Finance. 63(6):3069-96. (2008).

[19]. Odit MP, Chittoo HB. Does financial leverage influence investment decisions? The case of Mauritian firms. Journal of Business Case Studies (JBCS). 4(9):49-60. (2008).

[20]. Fama EF, French KR. The cross‐section of expected stock returns. the Journal of Finance. 47(2):427-65. (1992).

[21]. Flannery MJ, Rangan KP. Partial adjustment toward target capital structures. Journal of financial economics. 79(3):469-506. (2006).

[22]. Officer MS. Termination fees in mergers and acquisitions. Journal of Financial economics. 69(3):431-67. (2003).

[23]. Fuller K, Netter J, Stegemoller M. What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions. The journal of finance. 57(4):1763-93. (2002).

[24]. Morellec E, Zhdanov A. Financing and takeovers. Journal of Financial Economics. 87(3):556-81. (2008).

[25]. Harford J. Corporate cash reserves and acquisitions. The Journal of Finance. 54(6):1969-97. (1999).

[26]. “Data|CRSP-The Center For Research In Security Prices”. Crsp.Org. https://www.crsp.org/resources/data. (2002).

Cite this article

Deng,X. (2023). Deviation from the Target Capital Structure and Acquisition Choices. Advances in Economics, Management and Political Sciences,8,93-102.

Data availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 2nd International Conference on Business and Policy Studies

ISBN：978-1-915371-43-0(Print) / 978-1-915371-44-7(Online)
Editor：Javier Cifuentes-Faura, Canh Thien Dang
Conference website: https://2023.confbps.org/
Conference date: 26 February 2023
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.8
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Leary MT, Roberts MR. Do firms rebalance their capital structures? The journal of finance. 60(6):2575-619. (2005).

[2]. Frank MZ, Goyal VK. Testing the pecking order theory of capital structure. Journal of financial economics. 67(2):217-48. (2003).

[3]. Hovakimian A, Hovakimian G, Tehranian H. Determinants of target capital structure: The case of dual debt and equity issues. Journal of financial economics. 71(3):517- 40. (2004).

[4]. Modigliani F, Miller MH. The cost of capital, corporation finance and the theory of investment. The American economic review. 48(3): 261-97. (1958).

[5]. Jensen MC. Agency costs of free cash flow, corporate finance, and takeovers. The American economic review. 76(2):323-9. (1986).

[6]. Ross SA. Capital structure and the cost of capital. Journal of Applied Finance (Formerly Financial Practice and Education) Journal of Applied Finance. 15(1). (2005).

[7]. Myers SC, Malouf NS. Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial economics. 13(2):187-221. (1984).

[8]. Baker M, Wurgler J. Market timing and capital structure. The journal of finance.57(1):1-32. (2002).

[9]. Graham JR, Harvey CR. The theory and practice of corporate finance: Evidence from the field. Journal of financial economics. 60(2-3):187-243. (2001).

[10]. Titman S, Wessels R. The determinants of capital structure choice. The Journal of finance. 43(1):1-9. (1988).

[11]. Rajan RG, Zingales L. What do we know about capital structure? Some evidence from international data. The journal of Finance. 50(5):1421-60. (1995).

[12]. Leary MT, Roberts MR. Do firms rebalance their capital structures? The journal of finance. 60(6):2575-619. (2005).

[13]. Kayhan A, Titman S. Firms’ histories and their capital structures. Journal of financial Economics. 83(1):1-32. (2007).

[14]. Vasiliou D, Daskalakis N. Institutional characteristics and capital structure: A cross-national comparison. Global Finance Journal. 19(3):286-306. (2009).

[15]. Uysal VB. Deviation from the target capital structure and acquisition choices. Journal of financial economics. 102(3):602-20. (2011).

[16]. Long MS, Malitz IB. Investment patterns and financial leverage. InCorporate capital structures in the United States. (pp. 325-352). University of Chicago Press. (1985)

[17]. De Crom F. Impact of capital structure choice on investment decisions. Bachelor Thesis Finance. (2011).

[18]. Byoun S. How and when do firms adjust their capital structures toward targets?. The Journal of Finance. 63(6):3069-96. (2008).

[19]. Odit MP, Chittoo HB. Does financial leverage influence investment decisions? The case of Mauritian firms. Journal of Business Case Studies (JBCS). 4(9):49-60. (2008).

[20]. Fama EF, French KR. The cross‐section of expected stock returns. the Journal of Finance. 47(2):427-65. (1992).

[21]. Flannery MJ, Rangan KP. Partial adjustment toward target capital structures. Journal of financial economics. 79(3):469-506. (2006).

[22]. Officer MS. Termination fees in mergers and acquisitions. Journal of Financial economics. 69(3):431-67. (2003).

[23]. Fuller K, Netter J, Stegemoller M. What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions. The journal of finance. 57(4):1763-93. (2002).

[24]. Morellec E, Zhdanov A. Financing and takeovers. Journal of Financial Economics. 87(3):556-81. (2008).

[25]. Harford J. Corporate cash reserves and acquisitions. The Journal of Finance. 54(6):1969-97. (1999).

[26]. “Data|CRSP-The Center For Research In Security Prices”. Crsp.Org. https://www.crsp.org/resources/data. (2002).

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