Influence of capital structure adjustment in mergers and acquisitions on acquirers’ financial performance in Kenya

Ochieng', Bob Marshell
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Strathmore University
Capital structure is an important aspect in corporate finance since the profitability and the long term existence of the firm is affected by such decisions. Capital structure is expected to change after corporate restructuring such as Mergers and Acquisitions. Existing corporate structure literature has linked capital structure decisions and financial performance of firms. The aim of the study was to find the effect of corporate structure adjustment as measured by Leverage change and adjustment in leverage deficit on the financial performance of acquirers’ listed in Kenya. Financial performance is measured by Return on Equity, return on Asset and Tobin’s Q. The use of Tobin’s Q as an additional measure of financial performance adds to the different ways that previous studies have used to measure financial performance. Financial performance is expected to improve when the deficit between target leverage and Actual leverage is bridged. Similarly, an acquirer’s debt capacity is expected to increase after a merger and this increase in debt capacity is expected to influence the financial performance after the merger. A two-stage panel least squares regression were performed to establish the relationship between capital structure adjustment and financial performance. The study focused on mergers and acquisitions that were completed between 2007 and 2013. Analysis was carried out in the pre-merger period and 5 years’ post-merger period. The findings show that both Adjustment in Leverage Deficit (ALD) and Leverage Change (LC) have a significant influence on the three measures of financial performance: ROA, ROE and Tobin’s Q. The study found that ALD had a positive significant influence on acquirers’ financial performance. Similarly, LC had a positive significant influence on acquirers’ financial performance. The study should be of interest to corporate finance managers because the findings show that managers who are intentional about their capital structure adjustment during mergers and acquisitions have their financial performance significantly improved. The study however, had a number of limitations; there are limited number of non-financial acquirers’ listed in Kenya. Secondly, The Kenyan data on mergers and acquisition is also not readily available making it difficult to know some aspects of the deal characteristics such as cash payment or equity.
A dissertation submitted to Strathmore Business School in Partial fulfillment of the requirements for the award of Master of Science in Development Finance Degree of Strathmore University
Capital structure adjustment, Leverage change,, Mergers and Acquisitions, Financial performance