Ana Mugoša, Saša Popović
The purpose of this paper is to examine the causal relation between deviations from target
capital structure (leverage deficit) and acquisition choices in capital markets in Western Europe.
The analysis is conducted using a sample of 921 large companies, which represents a strong and
solid base for testing target capital structure and takeover interdependence, as the focus is on the
period when half of the largest M&A deals in Western Europe occurred. This study found that
leverage deficit is a crucial determinant of acquisition choices and market reaction on acquisition
announcements, measured by CARs to bidders. Companies that are underleveraged relative
to their target capital structure have a higher probability of undertaking acquisitions. On the
other hand, the market reacts unfavourably to acquisition announcements of underleveraged
acquirers – overleveraged companies undertake the most value-enhancing acquisitions, whilst
underleveraged companies make poor acquisition choices. This paper enriches the literature
by empirically extending the understanding of how managers make investment decisions in
relation to capital structure, and how capital markets assess the impact of these investments.
Keywords: capital structure, acquisitions, leverage deficit, Western Europe, capital market,
cumulative abnormal returns.
JEL Classification: G10, G14, G15, G30, G32, G34