The Burden of the National Debt: Evidence from Mergers and Acquisitions

36 Pages Posted: 3 Oct 2019 Last revised: 18 Apr 2021

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Yanhui Wu

Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN)

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance

Date Written: April 13, 2021

Abstract

Increases in government debt are associated with a reduction in the yield spread between high-grade corporate bonds and long-term treasuries and an increase in policy-related uncertainty. Consequently, increases in government debt significantly reduce the acquisition likelihood for firms. The effect is greater for corporations whose debt is a closer substitute for Treasuries. In addition, the negative effects are stronger for firms that have higher exposure to fiscal policy-related uncertainty. During periods of increasing national debt, firms reduce acquisition of targets with a higher degree of investment irreversibility. The announced deals are associated with lower premiums and lower synergistic gains.

Keywords: mergers and acquisitions, acquisition likelihood, national debt, substitutability of corporate debt, tax policy uncertainty.

JEL Classification: D80, E22, E62, G18, G34, G38

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui and Zhang, Huizhong, The Burden of the National Debt: Evidence from Mergers and Acquisitions (April 13, 2021). Available at SSRN: https://ssrn.com/abstract=3458690 or http://dx.doi.org/10.2139/ssrn.3458690

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

Yanhui Wu (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

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