Deviation from the target capital structure and acquisition choices: Evidence from Pakistan

Abstract

This study investigates the influence of leverage deviations from their target capital structures on the mergers and acquisitions decision. To explore the impact of leverage deviation on acquisition decision we used panel data of Pakistani firms over a period of 21 years (2000 to 2020). We used panel regression to understand the relationship of leverage deviation and acquisition.  Specifically, the research reveals that firms that find themselves over-leveraged compared to their target debt ratios exhibit a decreased likelihood of engaging in acquisitions. This research enhances the existing body of knowledge and specifically in the context of Pakistani firms’ behavior by empirically expanding the comprehension of how deviation from capital structure impacts the investment decision i.e. mergers and acquisition.

Key Words: Target Capital Structure, Acquisition, Mergers, Leverage Deviation, Pakistan.