Mergers & acquisitions, financial constraints and value creation: Evidence from emerging markets

This thesis comprises three empirical essays on mergers and acquisitions (M&As) and financial constraints in emerging markets. The first essay investigates the effects of mergers and acquisitions on target firms’ financial constraints and assesses whether these effects vary between domestic and cross-border deals. The second essay tests the moderating effects of the target countries’ financial sector development, bidders’ ownership type and deal-completion times on target firms’ financial constraints. The final essay examines whether financial constraints are priced on stock exchanges and, in turn, whether firms with greater financial constraints yield greater acquisition returns than those with fewer financial constraints in the short run. This essay also delves deeper into whether the existence of financial constraints leads to more gains through domestic deals than cross-border deals.In the first essay, we find that acquisitions significantly mitigate target firms’ pre-acquisition financial constraints. We determine the increased debt capacity of post-acquisition target firms to be the primary reason behind this notable mitigation. We also show that the financial constraints of domestic targets are significantly relaxed despite there being no significant change in the financial constraints of targets through cross-border deals.In the second essay, we provide evidence that target firms’ financial constraints are significantly reduced by M&As—but only for firms in countries with a relatively developed financial sector. We also find that M&As significantly mitigate the financial constraints of target firms acquired by private bidders. Private acquirers manage target firms more effectively by boosting sales growth following acquisitions. Finally, our regression estimations show that target firms’ financial constraints are only significantly relaxed for firms with short deal-completion times.In the final essay, we find that financial constraints are positively and significantly priced on stock exchanges in emerging markets and show that target firms with greater financial constraints gain more short-term abnormal announcement returns (3.8–6.3%) than unconstrained firms. Furthermore, we show that financial constraints are only positively and significantly priced for targets of domestic deals. We find that firms with greater financial constraints earn between 4.4% and 9.6% in acquisition returns through domestic deals. In contrast, firms with greater financial constraints gain between 0.04% and 2.4% in acquisition returns through cross-border deals—though these gains are not significant