Impact of Capital Structure Dynamics on Acquirers’ Post M&A Performance: Evidence from a Frontier Market

What the paper says

Mergers and Acquisitions (M&A) are a pivotal growth strategy for businesses aiming to realize market dominance and sustainable shareholder wealth maximization. M&A’s tend to minimize default risk and lower the cost of capital, resulting in financial synergies that directly influence the acquirers' capital structure. Consequently, the study examines the impact of capital structure dynamics on the acquirer’s financial performance in the post-M&A period. The sample consists of 630 firm-year observations from 90 listed acquirer companies in Sri Lanka, across seven years following the acquisition. The dynamic panel system GMM technique was applied to overcome any possible endogeneity, simultaneity, and unobservable heterogeneity concerns. The research outcomes corroborate the significant and negative association between leverage change and acquirer financial performance evidencing that a rise in leverage roots the cost of debt to outweigh debt benefits and deteriorate the acquirer’s performance. Further, the Leverage deficit is positively significant with acquirers’ financial performance suggesting that weighty deviations from the target pressurize managers to maximize shareholder wealth by ensuring efficient resource allocation. Finally, a negative and significant relationship was found between the Equity Multiplier and acquirer performance suggesting a rise in leverage causes shareholder value to reduce. The study findings are imperative for policymakers, government, and professional bodies to revamp the existing Takeover and Merger codes or enact mandatory rules and regulations. To the best of our knowledge, this is one of the early studies to empirically test the impact of capital structure dynamics on acquirer post-M&A financial performance in a frontier market context.