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Interactions Between Capital Structure and Merger Decisions

This paper presents a new model for analyzing the interplay between capital structure and merger decisions, incorporating both operational and financial synergies. The model posits that operational and financial synergies are inversely correlated. Al- though leverage tends to increase following a merger, the proposed model suggests that this outcome may not always be the case. The paper also examines the impact of exogenous and endogenous leverage decisions on merger timing, leverage ratios, and credit spreads. The model suggests that firms with the option to merge may have lower or higher leverage ratios than other firms depending on whether they adjust leverage in anticipation of the merger.