Influence of Financial Constraints on Mergers and Acquisitions

This paper studies the correlation between the level of financial constraint of the target company before the process of merger or acquisition and the synergy obtained after the completion of the deal and its relation to the company characteristics and the deal characteristics. The level of financial constraint is provided by the introduction of Kaplan-Zingales index as a proxy. The analysis is provided on the basis of 145 merger and acquisition deals of Russian companies completed between March 2010 and May 2020. This paper provides evidence in support of the hypothesis that financial constraints of the target company in terms of KZ index is significant parameter in the modeling of deal synergy in the form of 5-day Capital Abnormal Return and that the introduction of the financial constraints index increases the explanatory power of regressions on the deal synergy. The paper reveals negative correlation between the level of financial constraints and the synergy, received by the target company.