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Capital Structure and Mergers: Retrospective Evidence from a Natural Experiment

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Abstract

This analysis evaluates the impact of corporate debt in influencing mergers of local exchange companies in the United States telecommunications industry between 1988 and 2001. Firms’ financial structures significantly affect behavior and performance; yet no evidence has shown how firms’ financial structures influence their merger activities. The impact of corporate debt levels on the various mergers that took place during the merger wave in the sector is significantly negative for the first set of mergers carried out, and significantly negative, but with smaller impact, for the second set of mergers. The results support the idea that firms with high debt levels can be monitored carefully, precluding engagement in potentially-risky mergers so as to not engender negative financial outcomes.

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Notes

  1. Capital structure matters in influencing innovativeness, and financial concerns impact firms’ technology performance (Majumdar 2016; Mayer 1990).

  2. Given rapid industry changes, sequential mergers can increase market power and permit firms to obtain performance-enhancing economies of scale (Farrell and Shapiro 1990). Nevertheless, the participation of firms in several successive mergers compounds the positive and negative expectations that providers of debt associate with mergers.

  3. AT&T, the long-distance company, purchased the cable companies, TCI, Media One and Lenfest by 1999. It purchased the downtown Boston assets of Cable Vision, all for over $100 billion. The AT&T cable business could provide major competition to the local exchange carriers.

  4. The treatment effects model is described in Guo and Fraser (2010).

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Acknowledgements

Useful comments from the discussant and participants at the IIOC 2017 and CRESSE 2017 meetings and an anonymous reviewer are acknowledged.

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Authors and Affiliations

  1. University of Texas at Dallas, Richardson, TX, USA

    Sumit K. Majumdar

  2. Villanova University, Villanova, PA, USA

    Rabih Moussawi

  3. University of North Carolina at Wilmington, Wilmington, NC, USA

    Ulku Yaylacicegi

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  1. Sumit K. Majumdar
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Correspondence to Sumit K. Majumdar.

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Majumdar, S.K., Moussawi, R. & Yaylacicegi, U. Capital Structure and Mergers: Retrospective Evidence from a Natural Experiment. J Ind Compet Trade 18, 449–472 (2018). https://doi.org/10.1007/s10842-017-0266-z

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