M&A Under Financing Friction: Evidence from Credit Supply Shorfalls

Abstract

Despite empirical evidence showing that firms’ investments decrease during periods of credit supply shortfalls, little is known about how firms can eventually circumvent such financing frictions, thereby attenuating the adverse effects of negative credit supply shocks. In this paper, we show that firms can relieve financing frictions during banking crisis periods by selling equity stakes to outside investors. We examine mergers and acquisitions (M&A) transactions worldwide between 1990-2019 and the outcomes of targeted firms ex-post the deal. By exploring cross-sectional variation in the supply of credit induced by banking crises, we find that firms that have higher levels of expiring debt maturities in the year of the credit shock are more likely to become targets in M&A deals. Moreover, we find strong evidence that target firms invest more and issue more debt after the deal relative to other financially constrained firms that did not undergo such transactions. Our results remain robust after controlling for alternative explanations and show that M\&As can work as leeway to relieve financing frictions in periods when credit supply frictions are more prevalent.