Leverage, ownership structure, and returns to shareholders of target and bidding firms

Abstract

This paper tests for the joint effects of leverage and ownership structure in target firms on returns to shareholders in both target and bidding firms. For a sample of 81 targets and 81 bidders in successful takeovers covering the years 1980 through 1990, our event-study results indicate that the debt ratios of target firms are associated with significant positive abnormal returns for the shareholders of target firms. Correspondingly, the returns to shareholders of bidding firms are negatively affected by higher leverage in the target firm. In addition, we find that institutional ownership in targets has a positive effect on the excess dollar gains that accrue to their shareholders.