TY  - JOUR
AU  - Safieddine,Assem
AU  - Titman,Sheridan
TI  - Debt and Corporate Performance: Evidence from Unsuccessful Takeovers
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6068
PY  - 1997
Y2  - June 1997
UR  - http://www.nber.org/papers/w6068
L1  - http://www.nber.org/papers/w6068.pdf
N1  - Author contact info:
Sheridan Titman
Finance Department
McCombs School of Business
University of Texas at Austin
Austin, TX 78712-1179
Tel: 512/232-2787
Fax: 512/471-5073
E-Mail: titman@mail.utexas.edu
M2  - featured in NBER digest on 1998-08-01
AB  - This paper examines how debt affects firms following failed takeovers.  Using a sample of 573 unsuccessful takeovers, we find that, on average, targets significantly increase their debt levels.  Targets that increase their debt levels more than the median amount reduce their levels of capital expenditures, sell off assets, reduce employment, increase focus and increase their operating cash flows.  These leverage-increasing targets also realize superior stock price performance over the five years following the failed takeover.  In contrast, those firms that increase their leverage the least show insignificant changes in their level of investment and their operating cash flows and realize stock price performance that is no different than their benchmarks.  Those failed targets that increase their leverage the least, and fail to get taken over in the future, realize significant negative stock returns following their initial failed takeovers.  The evidence is consistent with the hypothesis that debt helps firms remain independent not because it entrenches managers, but because it commits the manager to making the improvements that would be made by potential raiders.
ER  -