The impact of government borrowing on corporate acquisitions: international evidence

Abstract

This study examines how variation in government borrowing affects corporate acquisition activity around the world. Using a large sample of firms and deals from 50 countries between 1991 and 2017, the paper finds that government debt issuance is strongly negatively associated with acquisition activity at the firm and aggregate levels. An instrumental variable approach corroborates these findings, thus supporting their causal interpretation. In response to increases in government borrowing, firms appear to make more value-enhancing deals. These effects are stronger for cash-financed deals and for financially stronger firms. Collectively, these findings suggest that rising government debt leads to ‘real crowding out’ by affecting firms’ ability to make large investments.