Two essays on mergers and acquisitions

Abstract

This thesis consists of two essays on mergers and acquisitions. In the first essay, I investigate how financial constraints of target firms are relieved after acquisitions using private firm financial data. I find that although targets do not generate higher earnings after being acquired, their internal financing is still improved because they can retain higher proportions of earnings and borrow interest-free capital from their parents. Targets can also obtain more debt financing with lower interest rate, borrow more trade credit from suppliers, and collect receivables from customers more quickly. The findings suggest that improvements in both internal financing from earnings retention and intra-group debt and external financing from the debt market and suppliers contribute to the reduction in targets' financial constraints. In the second essay, I study the impact of time zone differences among labor segments on firm productivity in a mergers and acquisitions (M&A) setting. I develop a model describing the extra labor productivity generated from cooperation between workers (i.e., synergy) and its changes around M&A. The model suggests that time zone differences lead to lower labor productivity and predicts negative market reactions to cross-time-zone M&A announcements. Using a sample of 3739 public M&A deals in the US, I find that time zone differences have a substantial negative effect on combined announcement returns. Consistent with model predictions, the negative association is stronger if the combining firms have high labor intensity or small total labor size, or if they are similar in labor size or in high technology industries. Additional tests suggest that acquirers do not lower their offer price in cross-time-zone M&A and therefore, bear most of the costs caused by time zone differences.