The Effects of Merger and Acquisitions on Acquiring Firms’ Leverage Levels: Evidence from Indonesia

Abstract

This study investigates whether firms in an emerging country have leverage targets and
perform leverage adjustments. Using data from the Indonesian market, this study is to find out if
firms conducting merger and acquisitions (M&As) have targeted levels of leverage and will
attempt to make adjustments of the leverage ratios to the projected optimum levels. The sample
includes financial data between 2000 and 2019. The results show that acquiring firms have
targeted levels of leverage, and M&A events trigger the changes in the leverage ratios of the
firms. However, the acquiring firms do not constantly make adjustments of their leverage ratios
to the projected optimum levels in the post-announcement period. These firms also demonstrate
relatively slower adjustment speeds compared to the previous studies. Hence the results of this
study indicate that Indonesian acquirers do neither fully follow the notions under the trade-off
theory nor the pecking order theory in organizing their capital structure.