Determinants of Capital Structure in Acquisitions: An Empircal Study on U.S Listed Firms between 1994-2024

Abstract

This thesis examines the factors influencing capital structure decisions in acquisitions by U.S. listed firms from 1994 to 2024. Utilizing a comprehensive dataset from S&P Capital IQ Pro, the study tests hypotheses grounded in theories such as the Modigliani-Miller theorem, Trade-Off Theory, and Pecking-Order Theory. The analysis incorporates various determinants including firm size, profitability, asset tangibility, and macroeconomic conditions to assess their impact on the choice between debt and equity financing in acquisition scenarios.

Our findings indicate that certain firm-specific characteristics such as size, profitability, transaction experience and asset tangibility significantly influence capital structure choices on acquisition financing. Moreover, macroeconomic variables like interest rates environment were found to have nuanced effect on the structure of the financing for the acquisition, suggesting that firms adjust their capital structures based on economic cycles. We also discovered that the impact direction of these variables is crucial; some exhibit positive influences whereas others contribute negatively. Notably, the impact direction of some variables shifts as we transition from examining factors that determine the choice of financing in the acquisition to analyzing factors that affect the level of debt when the acquisition financing is conditional of using debt.

The thesis contributes to the understanding of capital structure in a dynamic acquisition environment, highlighting how theoretical predictions align or diverge under real-world conditions.