The Burden of the National Debt: Evidence from Mergers and Acquisitions
36 Pages Posted: 3 Oct 2019 Last revised: 18 Apr 2021
Date Written: April 13, 2021
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: Suggested Citation