Easing Financing and M&A Investment Constraints: The Role of Corporate Industrial Diversification

Agyei-Boapeah, Henry

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.

• Journal Article Type: Article
• Acceptance Date: Nov 1, 2017
• Online Publication Date: Nov 5, 2017
• Publication Date: 2017
• Deposit Date: Jul 5, 2021
• Journal: Annals of Economics and Finance
• Print ISSN: 1529-7373
• Publisher: Peking University Press
• Peer Reviewed: Peer Reviewed
• Volume: 18
• Issue: 2
• Pages: 277-290
• Keywords: Corporate industrial diversification; leverage deficit; overleverage; financing constraint; M&As JEL Classification Numbers: G32, G34
• Public URL: https://nottingham-repository.worktribe.com/output/5756755
• Publisher URL: http://aeconf.com/Articles/Nov2017/aef180203.pdf