Effect of Acquisitions on Target Firms’ Financial Constraints

Abstract

A reason for acquisitions is that target firms, prior to being acquired, are financially constrained, and that the firms often finance their investments by internal resources. But, after acquisition, the constraints reduce and access to financial resources increases. This study developed a panel data regression model, using a sample of firms acquired by other firms, listed in the Tehran Stock Exchange in the years 1384 to 1393. The findings showed that the level of cash that target firms hold, and the sensitivity of cash to cash flow, as well as the sensitivity of investment to cash flow after acquisition decline, while investment increases. Thus acquisitions relieve problems on financial constraints in the target firms so that they may make investment decisions by reliance on access to both the external and internal financial resources.

Keywords

• acquisition
• financial constraint
• cash flow
• investment
• capital and money market