Published online by Cambridge University Press: 22 August 2019
Firms with lower leverage are not only less likely to experience financial distress but are also better positioned to acquire assets from other distressed firms. With endogenous asset sales and values, each firm’s debt choice then depends on the choices of its industry peers. With indivisible assets, otherwise-identical firms may adopt different debt policies, with some choosing highly levered operations (to take advantage of ongoing debt benefits) and others choosing more conservative policies to wait for acquisition opportunities. Our key empirical implication is that the acquisition channel can induce firms to reduce debt when assets become more redeployable.
This article uses ideas from earlier abandoned working papers. We thank Sebastian Gryglewicz and Alexei Zhdanov (the referees), Jarrad Harford (the editor), and many commenters and seminar participants at University of California at Berkeley, Stanford University, University of Toronto, Boston University, UCLA, University of Oslo, and at the 2014 Conference on Creditors and Corporate Governance at the University of Chicago and the 2015 Western Finance Association conferences.
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