with Isil Erel and Michael S. Weisbach

The Journal of Finance, Vol. 70 (February 2015), pp. 289-328.

 

Managers often claim that target firms are financially constrained prior to being acquired and that these constraints are eased following the acquisition. Using a large sample of European acquisitions, we document that the level of cash that target firms hold, the sensitivity of cash to cash flow, and the sensitivity of investment to cash flow all decline, while investment increases following the acquisition. These effects are stronger in deals that are more likely to be associated with financing improvements. Our findings suggest that acquisitions relieve financial frictions in target firms, especially when the target firm is relatively small.

Forthcoming, Review of Financial Studies

If the location of a firm’s operations is relevant for financing, multinationals should have easier access to different sources of funding relative to purely domestic firms because their operations are located in multiple countries. Consistent with this hypothesis, I find that conditional on receiving bank loans, U.S. multinationals are more likely to borrow from a foreign bank than domestic firms, particularly from a lender in a country where they have foreign subsidiaries. Being multinational also has a significantly positive effect on a firm’s probability of placing a corporate bond in international markets. One implication of multinationals’ greater funding flexibility is that they are less affected by capital market dislocations in their home country than domestic firms. Using the 2007-2009 financial crisis as a capital supply shock, I find that U.S. multinationals relied more on foreign funding sources in bank loans after the failure of Lehman Brothers in contrast to domestic firms. This partially explains why multinationals reduced their investment less than domestic firms. Multinationals’ financial flexibility has also a pricing impact. Multinationals pay a lower spread than domestic firms when receiving bank loans from foreign lenders. 

Firms hold liquid assets to enhance their ability to invest efficiently when external financing costs are high, especially during poor macroeconomic conditions. Using a sample of 47,378 acquisitions from 36 countries between 1997 and 2014, we study how the relation between firms’ cash holdings and their acquisition decisions changes over macroeconomic cycles. We find that higher cash holdings increase the likelihood a firm will make an acquisition. Better macroeconomic conditions, which lower the cost of external finance, also increase the likelihood of an acquisition. However, larger cash holdings decrease the sensitivity of acquisitions to macroeconomic factors, suggesting that cash holdings lower financing constraints during times when the cost of external finance is high. Announcement day abnormal returns for acquirers follow a consistent pattern: they decrease with acquirer cash holdings and with better macroeconomic conditions. The results are consistent with the view that firms choose liquidity levels to insure against poor macroeconomic conditions.

with Xue Wang and Xiaoyan Zhang

Using monthly returns of 18,996 U.S. stocks over 1973-2015 and 23,965 stocks in 22 countries over 1990-2015, we find that multinational companies earn significantly higher monthly returns than domestic companies by 23bps per month. We further investigate whether the return difference is driven by risk factors or known asset-pricing anomalies, and we find that none of them can fully explain the return premium of multinationals. The magnitude of the multinational return premium depends on the location of foreign operations. The return premium is more prominent for multinationals operating in countries with lower GDP growth, lower private credit, lower R&D export, higher labor cost, and greater geographic distance.

with Kyung Yun Lee

This paper studies how the investment horizon of institutional investors affects firms’ earnings management strategies. We find that firms largely held by long-term investors are more likely to manage earnings through adjusting operational decisions than through manipulating accruals. The impact of an investor’s trading horizon on real activities manipulation is stronger when long-term investors face high performance pressures with low fund flows and high market uncertainty and when they have strong influence on managers with large holdings. We further document that adverse future consequences of operational adjustment are relatively less severe for the firms with long-term investors than for those with short-term investors. Overall, the evidence suggests that firms choose earnings management methods to meet earnings expectations of institutional investors who have different earnings target windows. Our identification strategy exploits the Russell 2000 Index inclusions as an instrumental variable for the investor horizon and confirms our results are robust to endogeneity concerns.

with Natalia Reisel
 
We examine motives to sell private firms and provide insights into the sources of value creation from acquisitions of private targets. Using a novel dataset, we document that less profitable, highly leveraged private firms that tend to underinvest are likely to be sold. Further, these firms experience a high level of top management turnover around the period of the acquisitions and this turnover is sensitive to poor firm performance. Additionally, we find significant improvement in firm performance such as profitability and sales growth following the acquisitions. These firms also adjust their capital structure towards lower leverage. By and large, our results suggest that sales of private firms facilitate the transition of assets to a more efficient use.