Does Acquisition Trigger Follow-up Acquisitions? The Role of Relative Financial Constraints

Abstract

Relative financial constraints affect firms’ aggressiveness in industry competition. Using eight alternative proxies for financial constraints, we find that consistent with the deep pocket theory, in the three years following an acquisition, the unconstrained rivals tend to become follow-up acquirers while the constrained rivals are more likely to get acquired. The effect is more pronounced in M&A-intensive industries, among the rivals with more growth opportunities and lower operating efficiency. Also, the rivals would become worse off if they do not make follow-up acquisitions. Overall, these findings indicate that considering firms’ relative financial constraints can be an alternative approach to detecting anticompetitive acquisitions.