Asset Volatility and Capital Structure: Evidence from Corporate Mergers

• 成果类型: Article
• 署名作者: Levine, Oliver; Wu, Youchang
• 署名单位: University of Wisconsin System; University of Wisconsin Madison; University of Oregon
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2020.3607
• 发表日期: 2021
• 页码: 2773-2798
• 关键词: capital structure; Trade-off theory; Mergers and acquisitions (M&A); Financial synergy; Corporate cash holdings

摘要

We exploit cross-sectional variation in the predictable changes in asset volatility following corporate acquisitions to identify the effect of business risk on capital structure. We find that postmerger changes in leverage and cash holdings are strongly predicted by expected asset volatility changes estimated using premerger information. These capital structure adjustments are partly achieved through the choice of payment method. Our findings provide direct evidence for the coinsurance effect of mergers on debt capacity. More broadly, they suggest that firm risk is a first-order determinant of leverage, consistent with the tradeoff theory of capital structure. Our coefficient estimates imply that a one-standard deviation decline in a firm's asset volatility corresponds to a 7.5-percentage point increase in leverage.