Leverage and corporate performance: Evidence from unsuccessful takeovers

This paper finds that, on average, targets that terminate takeover offers s ignificantly increase their leverage ratios. Targets that increase their le verage ratios the most reduce capital expenditures, sell assets, reduce emp loyment, increase focus, and realize cash flows and share prices that outpe rform their benchmarks in the five years following the failed takeover. Our evidence suggests that leverage-increasing targets act in the interests of shareholders when they terminate takeover offers and that higher leverage helps firms remain independent not because it entrenches managers, but beca use it commits managers to making the improvements that would be made by po tential raiders.