Influence of capital structure adjustment in mergers and acquisitions on acquirers’ financial performance in Kenya
Date
2020-06
Authors
Ochieng', Bob Marshell
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
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.
Description
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
Keywords
Capital structure adjustment, Leverage change,, Mergers and Acquisitions, Financial performance