Niklas Lauslahti 

Leverage and buyer returns in Nordic M&A 

Evidence on value creation 

 

 

 

 

 

 

 
  

Vaasa 2025 

School of Accounting and Finance  
Master’s Thesis in Finance  

Master’s Programme in Finance 



2 

UNIVERSITY OF VAASA 
School of Accounting and Finance 
Author: Niklas Lauslahti 
Title of the thesis:  Leverage and buyer returns in Nordic M&A: Evidence on value cre-

ation 
Degree: Master of Science in Economics and Business Administration 
Discipline: Master’s Programme in Finance 
Supervisor: Anupam Dutta  
Year: 2025 Pages: 93 

 
ABSTRACT: 
This thesis examines the use of financial leverage and its effects on buyer return expectations 
and value creation in mergers and acquisitions conducted in the Nordic countries between 2014 
and 2023. M&A transactions are a central element of corporate growth strategies, and capital 
structure has an important role in financing these deals and influencing their post-acquisition 
financial performance. This study investigates how leverage affects the acquiring firms’ financial 
performance, measured by return on equity (ROE) and stock-based buy-and-hold abnormal 
return (BHAR). 
 
This research applies several capital structure theories, including the trade-off theory, pecking 
order theory, and agency theory. Key concepts include financial leverage, value creation, capital 
structure, and M&A. Previous literature shows that companies tend to maintain their target 
capital structure even during large-scale acquisitions and that leverage may enable value 
creation or, alternatively, introduce risk. 
 
The empirical part of this study is based on quantitative analysis using a dataset of 619 listed 
M&A transactions in Denmark, Finland, Norway, and Sweden, collected from the LSEG database. 
Iceland is excluded due to limited data availability. Regression models are used to assess the 
relationship between leverage and buyer returns over one year. The dependent variables in the 
analysis are ROE and BHAR. The study also considers the effect of transaction size, domestic 
versus cross-border nature, and the size of the acquiring firm. 
 
The results indicate that financial leverage is commonly used, especially in larger and cross-
border acquisitions. Leverage is found to be positively associated with short-term value creation, 
particularly when the acquirer has low initial debt levels and effective liquidity management. 
Furthermore, larger acquiring firms appear to be more successful in realizing synergies and 
achieving higher returns than smaller companies. Domestic acquisitions show a slightly better 
performance in operational terms compared to international transactions. 
 
It is concluded that leverage can be an effective tool for value creation in Nordic M&A when 
aligned with the firm’s capital structure strategy. The study provides practical insights on how 
debt financing may be strategically used to enhance shareholder value and improve financial 
outcomes in acquisitions. The Nordic context, characterized by economic stability, conservative 
financial culture, and strong corporate governance, provides a unique environment in which the 
effects of leverage on M&A performance can be examined in depth. 
 
 

KEYWORDS: mergers and acquisitions, leverage, value creation, capital structure, Nordic 
countries, ROE, BHAR 



3 

 
TIIVISTELMÄ: 
Tässä pro gradu -tutkielmassa tarkastellaan velkavivun käyttöä ja sen vaikutuksia ostajan tuotto-
odotuksiin ja arvonluontiin Pohjoismaissa toteutetuissa yritysostoissa vuosina 2014–2023. Yri-
tysjärjestelyt ovat keskeinen osa yritysten kasvustrategioita, ja pääomarakenteella on merkit-
tävä rooli sekä yrityskauppojen rahoituksessa että niiden jälkeisessä taloudellisessa menestyk-
sessä. Tutkielman tavoitteena on selvittää, kuinka velkavipu vaikuttaa ostajien taloudelliseen 
suorituskykyyn, mitattuna muun muassa oman pääoman tuotolla (ROE) ja osaketuotolla, eli suo-
meksi käännettynä ”osta ja pidä” -epänormaalituotolla (BHAR, Buy-and-Hold Abnormal Return). 
 
Tutkimuksessa sovelletaan useita pääomarakenneteorioita, kuten trade-off -teoriaa, pecking or-
der -teoriaa sekä agenttiteoriaa. Keskeisiä käsitteitä ovat velkavipu, arvonluonti, pääomara-
kenne sekä yritysostot ja -fuusiot. Aiempi kirjallisuus osoittaa, että yritykset pyrkivät säilyttä-
mään tavoitellun pääomarakenteensa myös suurten yritysjärjestelyjen yhteydessä ja että velka-
vipu voi sekä mahdollistaa arvonluontia että lisätä riskejä. 
 
Empiirinen osa perustuu kvantitatiiviseen analyysiin, jossa hyödynnetään LSEG-tietokannasta 
kerättyä aineistoa 619 listatusta yritysostosta Tanskassa, Suomessa, Norjassa ja Ruotsissa. Islanti 
on rajattu pois aineiston puutteellisuuden vuoksi. Analyysissä käytetään regressiomalleja, joilla 
tarkastellaan velkavivun yhteyttä ostajien tuottoihin yhden vuoden ajanjaksolla. Riippuvina 
muuttujina käytetään oman pääoman tuottoa ja osaketuottoa. Lisäksi tarkastellaan transaktioi-
den kokoa, kotimaisuutta sekä ostavan yrityksen suuruutta. 
 
Tulokset osoittavat, että velkavivun käyttö on yleistä erityisesti suuremmissa ja rajat ylittävissä 
yritysostoissa. Velkavipu näyttää korreloivan positiivisesti ostajan lyhyen aikavälin arvonluonnin 
kanssa, erityisesti silloin, kun ostajalla on lähtötilanteessa alhainen velkaantumisaste ja toimiva 
likviditeetin hallinta. Lisäksi havaittiin, että suuremmat yritykset kykenevät paremmin realisoi-
maan synergioita ja saavuttamaan korkeampia tuottotasoja kuin pienemmät toimijat. Kotimai-
set yritysostot näyttäisivät olevan hieman tehokkaampia operatiivisen suorituskyvyn näkökul-
masta kuin kansainväliset kaupat. 
 
Johtopäätöksenä voidaan todeta, että velkavipu voi toimia tehokkaana välineenä arvonluon-
nissa Pohjoismaisessa yritysostokontekstissa, kunhan se on linjassa yrityksen pääomaraken-
nestrategian kanssa. Tutkimus tarjoaa hyödyllisiä näkemyksiä siitä, kuinka velkarahoitusta voi-
daan käyttää strategisesti arvon maksimoimiseksi ja taloudellisen suorituskyvyn parantamiseksi 
yritysjärjestelyissä. 
 
 
 

AVAINSANAT: yritysostot ja -fuusiot, velkavipu, arvonluonti, pääomarakenne, Pohjoismaat, 
oman pääoman tuotto, BHAR 

VAASAN YLIOPISTO 
Laskentatoimen ja rahoituksen yksikkö 
Tekijä: Niklas Lauslahti 
Tutkielman nimi:  Leverage and buyer returns in Nordic M&A: Evidence on value cre-

ation 
Tutkinto: Kauppatieteiden maisteri 
Oppiaine: Rahoituksen maisteriohjelma 
Työn ohjaaja: Anupam Dutta  
Vuosi: 2025 Sivumäärä: 93  



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Contents 

1 Introduction 8 

1.1 Background and motivation 8 

1.2 Purpose of the study 11 

1.2.1 Relevance 17 

1.3 Structure of the study 18 

2 Theoretical background 19 

2.1 Mergers and acquisitions 19 

2.1.1 History of M&A 20 

2.1.2 Types of mergers 23 

2.1.3 M&A strategy 24 

2.1.4 The form and process of M&A 25 

2.2 M&A theories and concepts 26 

2.2.1 Efficiency theory 27 

2.2.2 Concept of synergy 28 

2.2.3 Firm size 28 

2.2.4 Empire-building theory 29 

2.2.5 Hubris hypothesis 30 

2.3 Capital structure theories 30 

2.3.1 Modigliani-Miller theorem 31 

2.3.2 Trade-off theory 31 

2.3.3 Pecking order theory 32 

2.3.4 Market timing theory 33 

2.3.5 Agency problem theory 33 

2.3.6 Free cash flow theory 34 

2.4 The role of leverage in M&A 35 

2.5 Buyer returns and value creation 37 

2.5.1 Financial synergies and the leverage effect 37 

2.5.2 Broader merger theories 38 

3 Literature review 41 



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3.1 Leverage in M&A 41 

3.1.1 Credit rating and leverage decisions 43 

3.1.2 Leverage in cross-border transactions 44 

3.1.3 Capital structure and target firms in M&A 46 

3.1.4 Adjustment to target leverage post-acquisition 49 

3.1.5 Implications for acquirers and target selection 49 

3.2 Buyer return optimals and value creation 49 

3.3 M&A outcomes and value creation 50 

3.3.1 Target versus bidder returns 51 

3.3.2 Factors influencing value creation 52 

3.3.3 Nordic M&A market observations 55 

3.4 Method of payment 55 

3.4.1 Cash payments 56 

3.4.2 Stock payments 56 

3.4.3 Mixed payments 57 

3.4.4 Perimeters affecting the choice of the payment method 57 

3.5 Nordic market regulation effect to the valuation data 60 

4 Data and methodology 62 

4.1 Data 62 

4.1.1 Data selection 63 

4.1.2 Model specification and setup 68 

4.1.3 Variable selection 69 

4.2 Methodology 71 

4.2.1 Regression model for buy-and-hold abnormal return (BHAR) 71 

4.2.2 Regression model for return on equity (ROE) 72 

5 Empirical results 74 

5.1 Regression results and analysis 74 

5.1.1 Determinants of BHAR 74 

5.1.2 Determinants of ROE 77 

5.2 Comparative perspective 79 



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5.3 Hypotheses evaluation 80 

5.4 Limitations 83 

6 Conclusions 85 

References 88 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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Figures 
 
Figure 1. Number of yearly transactions per country. 64 

Figure 2. Number of total transactions by country. 65 

 
 
Tables 
 
Table 1. Number of each transaction per industry in total and by country. 66 

Table 2. Number of cross-border and domestic transactions. 66 

Table 3. Descriptive statistics. 68 

Table 4. Regression results for BHAR. 75 

Table 5. Regression results for ROE. 77 

Table 6. Summary of hypotheses and their validations. 82 

 
 
Abbreviations 
 
M&A  Mergers and Acquisitions 

BHAR  Buy-and-Hold Abnormal Return 

ROE  Return on Equity 

OLS  Ordinary Least Squares 



8 

1 Introduction 

1.1 Background and motivation 

Mergers and acquisitions (M&A) are key drivers of corporate growth and market evolu-

tion globally. Capital structure decisions are fundamental to shaping corporate strategy, 

particularly in M&A. Decisions regarding leverage and financing influence a firm’s ability 

to undertake acquisitions and determine the combined entity’s long-term success and 

stability. A firm’s leverage can be defined as the ratio of debt to equity of the firm’s cap-

ital structure. This thesis investigates how leverage usage in Nordic M&A transactions 

between 2014 and 2023 influences buyer returns and value creation.  

 

The Nordic region is known for its stable economic environment, strong regulatory 

frameworks, and emphasis on corporate governance, and it presents a unique setting 

for studying the effects of leverage in M&A transactions. Unlike the highly leveraged 

deals seen in private equity-driven markets, firms in the Nordic region often adopt a 

more conservative approach to financing. Therefore, assessing whether leverage-driven 

acquisitions yield the same benefits as in more aggressive financial markets is particu-

larly relevant. 

 

Historically, based on capital structure theories, a consensus exists that companies have 

optimal targeted capital structures determined by the right balance of costs and benefits 

of debt financing (Uysal, 2011). Additionally, most of the research primarily focuses on 

larger markets, such as the US, with less attention given to specific regional contexts, 

such as the Nordic countries, which this study focuses on, and where the outcomes of 

leveraged M&A deals might differ.  

 

The trade-off theory suggests that firms maintain target leverage levels by balancing the 

benefits of tax shields against the costs of financial distress (Kraus & Litzenberger, 1973). 

However, deviations from these target leverage levels are standard, and their impact on 



9 

acquisition strategies remains a critical area of investigation (Harford et al., 2009; Uysal, 

2011). 

 

Harford et al. (2009) explore whether firms actively adhere to target leverage levels dur-

ing significant acquisitions and found that deviations significantly influence financing 

choices. Firms with leverage above their targets are less inclined to finance acquisitions 

with debt and tend to rely more on equity. Moreover, their study reveals that firms grad-

ually realign their leverage back to target levels post-acquisition, often reversing over 75% 

of the leverage deviations within five years. This behaviour emphasizes the strategic im-

portance of target leverage adherence, particularly for high-growth firms that face more 

significant financial constraints. 

 

However, the extent to which leverage deviations impact firm performance remains un-

clear, particularly in mid-sized transactions, which dominate the Nordic M&A landscape. 

Understanding whether leverage flexibility enhances or constrains post-acquisition per-

formance is essential for investors, policymakers, and corporate decision-makers ad-

dressing the complexities of capital structure management. 

 

Recent research highlights that value creation in M&A transactions depends on the tar-

get’s pre-acquisition value and the acquiring firm’s competencies. Alhenawi and Stilwell 

(2017) propose that firms with strong pre-acquisition performance and financial ratios 

are better positioned to realize synergies and sustain long-term value creation. Moreover, 

their study suggests that M&A success positively correlates with lower debt levels, effi-

cient liquidity management, and acquirer-specific strengths. Notably, realizing M&A syn-

ergies often takes time as firms gradually internalize and optimize the acquired resources, 

underscoring the necessity of long-term performance evaluation. This perspective aligns 

with the growing consensus that short-term valuation measures may underestimate the 

actual benefits of M&A transactions, which are more accurately reflected in post-acqui-

sition performance indicators such as return on equity and cumulative abnormal returns. 

 



10 

This study expands on this perspective by investigating whether acquiring firms in the 

Nordic region follow a similar trajectory regarding value realization and financial perfor-

mance post-acquisition. Given the post-financial crisis context of the research period 

(2014-2023), this study also aims to provide a foundation for future studies to explore 

whether acquirers adjusted their leverage strategies in response to changing market con-

ditions and regulatory pressures. 

 

Similarly, Uysal (2011) examines the role of leverage deficits in shaping acquisition deci-

sions. The study demonstrates that overleveraged firms are less likely to pursue acquisi-

tions and, when they do, prefer smaller targets with lower premiums. These firms also 

tend to rebalance their capital structures in anticipation of future acquisitions. The find-

ings suggest that the interplay between leverage deficits and acquisition strategies is 

critical to corporate behaviour, particularly in financial frictions. 

 

Prior studies highlight the complex relationship between capital structure management 

and acquisition strategies, emphasizing the importance of maintaining optimal leverage 

levels. This thesis seeks to extend the understanding of this dynamic by focusing on the 

Nordic M&A landscape, examining how leverage influences optimal buyer returns and 

value creation in mergers and acquisitions. By analysing post-financial crisis transactions 

between 2014 and 2023, this research aims to contribute to the broader discourse on 

capital structure and corporate finance. 

 

Using leverage in M&A is a well-established concept in corporate finance, yet its precise 

impact on optimal buyer returns and value creation remains debatable. While existing 

research has explored the role of leverage in increasing potential returns, there is limited 

understanding of how it directly influences the optimal returns of acquirers, and the 

long-term value created post-acquisition. Additionally, much of the literature primarily 

focuses on larger markets, with less attention given to specific regional contexts such as 

the Nordic countries. This project aims to fill this gap by analysing the effects of leverage 

usage in Nordic M&A transactions, addressing both the immediate financial outcomes 



11 

for buyers and the subsequent value creation. By examining a region often underrepre-

sented in M&A research, this study will offer new insights into how leverage interacts 

with buyer expectations and performance in a distinct market, contributing to the 

broader understanding of leverage's role in corporate finance and M&A strategy. The 

study focuses on the time window of 2014-2023, specifically examining M&A transac-

tions conducted in Denmark, Finland, Norway, and Sweden. Iceland is excluded from this 

study due to data availability issues and the fact that it only has a few transactions. 

 

 

1.2 Purpose of the study 

The core idea of this research is to analyse how leverage usage in Nordic M&A transac-

tions influences buyer returns and value creation, focusing on short-term post-acquisi-

tion performance. Key concepts include leverage (debt financing), operational perfor-

mance, value creation, stock price growth, and M&A outcomes.  

 

To answer the research question, a quantitative analysis will be conducted using data 

from LSEG (ex., Refinitiv), focusing on M&A deals in Nordic countries over the past dec-

ade. The study will examine the relationship between leverage usage and key perfor-

mance indicators, such as return on equity (ROE), stock price reactions, and short-term 

value creation post-acquisition according to buy-and-hold abnormal return (BHAR).  

 

Different markets exhibit significantly varying practices and cultures when executing 

M&A deals. Some primarily use cash as a payment method, while others rely on share 

exchanges, with hybrid models also being utilized. In practice, cash transactions are more 

likely to involve financing through debt specifically taken on for the transaction, making 

them leveraged transactions. 

 

Leverage is fundamental in mergers and acquisitions, influencing deal financing and 

post-acquisition performance. Using debt to fund acquisitions can provide financial ben-

efits such as tax advantages, improved capital efficiency, and stronger managerial 



12 

discipline. However, its impact on short-term value creation remains a subject of debate. 

While some studies suggest that leveraged transactions enhance firm performance, oth-

ers highlight the risks associated with excessive debt, such as financial distress and re-

duced strategic flexibility. 

 

The underlying assumption of this study is that in Europe, particularly in the Nordic coun-

tries, most M&A transactions are executed through cash payments utilizing financial lev-

erage. European and especially Nordic financial markets have traditionally been more 

bank-driven than, for example, the U.S. financial market. 

 

Previous research has shown that capital structure decisions strongly influence acquisi-

tion strategies. For instance, Harford et al. (2009) and Uysal (2011) demonstrate that 

firms with a target-oriented capital structure are more likely to use debt financing in ac-

quisitions, while firms with excessive leverage tend to avoid further debt. These findings 

suggest that financial leverage is not random but systematically related to firms’ capital 

structure targets and strategic objectives. Consequently, the first research hypothesis 

examines how financial leverage has been used in the Nordic corporate acquisitions over 

the past decade. 

 

H1: Majority of the acquiring companies in the Nordics utilize leverage in their acquisi-

tions. 

 

Larger transactions are also expected to involve a greater use of financial leverage than 

smaller transactions, as alternative financing options are more readily available for 

smaller deals. Larger transactions often involve higher financing needs and, conse-

quently, greater reliance on debt financing. According to Pires and Pereira (2020), lever-

aged acquisitions tend to occur sooner and with higher premiums, particularly in larger 

deals where tax benefits and financial flexibility can be maximized. This supports the 

view that financial leverage is more prevalent in high-value transactions. 

 



13 

The first sub-hypothesis examines whether there are differences in the use of financial 

leverage depending on whether the transaction size is above or below the average of 

the studied dataset. 

 

H1a: Financial leverage is used more in large transactions than in small transactions. 

 

In cross-border transactions, firms may face increased complexity, higher costs, and in-

tegration risks, which can drive the need for structured financial solutions such as debt 

financing. Cioli et al. (2020) find that post-acquisition leverage tends to increase more 

significantly in cross-border transactions, especially for target firms. Additionally, Hu and 

Yang (2016) emphasize that firms with lower initial leverage are more likely to pursue 

and finance international acquisitions with debt. 

 

The second sub-hypothesis examines whether there are differences in the use of finan-

cial leverage depending on whether the transaction occurs within a single Nordic country 

or across national borders. 

 

H1b: Financial leverage is utilized to a greater extent in cross-border transactions com-

pared to transactions conducted within a single country. 

 

Leverage is often assumed to induce financial discipline, improving post-acquisition per-

formance through more efficient resource allocation and cost control. According to 

Alhenawi and Stilwell (2017), firms with lower debt levels, efficient liquidity manage-

ment, and strong pre-acquisition performance are more likely to generate value from 

acquisitions. Furthermore, Harford et al. (2009) suggest that leverage-related decisions 

have long-term implications for firm performance due to post-deal capital structure ad-

justments. 

 

Another key consideration is whether leverage leads to real improvements in firm per-

formance after the acquisition. Firms that take on debt may experience greater financial 



14 

discipline, as they must generate sufficient cash flows to meet debt obligations. This 

could lead to better cost control, improved operational efficiency, and ultimately higher 

returns on investment. Additionally, if investors perceive leverage as a sign of confidence 

in the acquisition’s success, stock prices may reflect this optimism over time. These ar-

guments form the basis of the second hypothesis, measuring the acquiring firm's ROE 

one year after the transaction. 

 

H2: Leverage usage in M&A transactions positively impacts post-acquisition operative 

performance. 

 

This hypothesis examines whether leveraged acquisitions lead to short-term improve-

ments in firm performance, measured by return on equity (ROE) and stock price appre-

ciation. If this hypothesis holds, leveraged acquisitions should be associated with higher 

returns on investment, stock price appreciation, and enhanced operational performance. 

The presence of debt may serve as an external control mechanism that ensures re-

sources are allocated efficiently, potentially driving long-term value creation. However, 

if leverage is excessive or poorly managed, the financial burden could outweigh its ben-

efits, leading to underperformance. 

 

The practical execution of cross-border transactions and the realization of their expected 

efficiencies can often be more challenging compared to domestic transactions. This is 

due to factors such as greater differences in language and corporate cultures, regulatory 

discrepancies, and variations between countries in aspects such as employee participa-

tion in corporate decision-making. 

 

Rose et al.’s (2017) research suggests that the average announcement returns for cross-

border transactions are lower than for domestic transactions, although the differences 

are not always statistically significant. These results reflect various cross-border issues 

that may diminish value creation. 

  



15 

Therefore, this sub-hypothesis examines how profitability differences have evolved over 

the past decade between cross-border and domestic transactions conducted in the Nor-

dic countries. 

 

H2a: Cross-border transactions provide lower impacts on post-acquisition operative per-

formance compared to domestic transactions. 

 

Larger companies typically have a more extensive management organization and greater 

experience in successfully executing M&A processes. This reduces the risk of failure in 

realizing synergies. Therefore, it is important to examine whether there are differences 

in the extent to which companies of different sizes have successfully achieved opera-

tional efficiency. 

 

Larger companies often possess more developed managerial structures and integration 

capabilities, which can reduce post-acquisition risks and enhance operational efficiency. 

Alexandridis et al. (2017) show that large-cap acquisitions in the post-financial crisis pe-

riod were associated with increased shareholder returns and synergy realization, indi-

cating a size advantage in executing successful M&A strategies. 

 

H2b: Larger companies manage to achieve better impacts on post-acquisition operative 

performance compared to smaller companies. 

 

This sub-hypothesis examines whether there are differences in operative performance 

depending on whether the acquirer’s size is above or below the average of the studied 

dataset. 

 

The strategic use of debt can enhance financial returns due to tax-deductible interest 

payments and lower cost of capital, particularly in low-interest-rate environments. Ang, 

Daher, and Ismail (2018) find that increased debt capacity after M&A improved long-

term market performance for acquirers. Additionally, Pires and Pereira (2020) 



16 

demonstrate that leverage usage can accelerate acquisitions and increase deal premi-

ums, which may translate into higher short-term value capture. 

 

The third aspect focuses on the process of value creation. Beyond post-acquisition out-

comes, leverage may also influence the financial returns of the acquiring firm at the time 

of the deal. Debt financing can lower the overall cost of capital due to tax-deductible 

interest payments, making it an attractive funding option compared to equity. Moreover, 

debt financing can provide higher return potential in a low-interest-rate environment, as 

companies can leverage relatively inexpensive capital to generate stronger financial out-

comes. These factors suggest that firms utilizing more leverage in M&A deals may 

achieve superior financial returns, forming the basis of the third hypothesis. 

 

H3: Leverage usage in Nordic M&A transactions positively correlates with higher buyer 

short-term value creation.  

 

This analysis examines how leverage usage in Nordic M&A transactions is positively as-

sociated with the buyer's BHAR (Buy-and-Hold Abnormal Return) one year after the 

transaction. This hypothesis suggests that acquirers using more debt in M&A deals ex-

perience higher financial returns, possibly due to tax benefits, reduced cost of capital, or 

improved financial discipline. 

 

If leverage enhances buyer returns, it supports debt-financed acquisitions as an effective 

strategy for maximizing shareholder value. However, the relationship between leverage 

and optimal returns is complex, as financial gains depend on factors such as industry 

conditions, interest rates, and the ability of the acquiring firm to integrate and improve 

the target company’s operations. 

 

By testing these hypotheses, this study seeks to provide empirical insights into the role 

of leverage in Nordic M&A transactions. The findings will contribute to a broader 



17 

understanding of how debt financing influences short-term financial performance and 

buyer returns in the post-acquisition phase. 

 

 

1.2.1 Relevance 

This research topic is relevant and valuable for several reasons. It has economic signifi-

cance, as M&A has an important role in the Nordic region's economy, particularly in in-

dustries such as energy, technology, and manufacturing. Understanding the impact of 

leverage on value creation is important for improving investment decisions. The study 

broadens the current understanding and offers new, valuable investor insights by ana-

lysing how leverage influences buyer return expectations. This is particularly relevant in 

the Nordic market, which is known for its unique corporate governance structures and 

risk-averse financial culture. 

 

Furthermore, the findings can support strategic decision-making processes. For compa-

nies planning M&A strategies, understanding the balance between debt financing and 

value creation can help them make more informed and effective choices. With their em-

phasis on sustainable growth, Nordic businesses can benefit from strategies tailored to 

minimize financial risk while maximizing returns. 

 

Additionally, the regulatory environment varies across geographical regions. The Nordic 

region has distinct financial regulations that influence how leverage is used in M&A 

transactions. Therefore, a study on this region can help refine frameworks to encourage 

responsible leverage usage. Market dynamics in different geographical areas can also 

affect the deals. The Nordic M&A landscape is dominated by mid-sized firms with strong 

international ties. By studying leverage effects in this context, firms can better align their 

financing strategies with growth opportunities in global markets. 

 

Finally, M&A decisions require careful consideration of risk management. Understanding 

leverage's role in M&A outcomes can improve risk management practices, especially in 



18 

sectors prone to economic fluctuations. This research can fill a significant knowledge gap 

by tailoring insights specifically for the Nordic market, where economic stability, corpo-

rate governance, and sustainable financing practices differ from other regions. 

 

 

1.3 Structure of the study 

This study is organized into six main chapters, each addressing the topic, which is a crit-

ical aspect of capital structure in mergers and acquisitions. The first chapter introduces 

the topic, providing the study’s background, motivation, and purpose, along with its 

structure. Chapter two lays the theoretical groundwork by presenting the theoretical 

framework and presents mergers and acquisitions. It explores M&A history, key theories, 

models, types of M&A, and their impact, focusing on the role of leverage and its influ-

ence on optimal buyer returns and value creation. The third chapter reviews existing 

literature on leverage in M&A, buyer return expectations, and value creation, highlight-

ing gaps in current research to provide the rationale for this study. Chapter four outlines 

the research design and methodology, data collection, variable measurement, and the 

statistical methods. The fifth chapter presents the empirical results, offering a compre-

hensive analysis and discussion of the findings in relation to the hypotheses while ad-

dressing any limitations of the study. Finally, chapter six concludes the study by summa-

rizing key insights, discussing implications for practice and theory, and suggesting direc-

tions for future research. 



19 

2 Theoretical background 

This chapter covers the topic’s theoretical frameworks and background. It reviews past 

literature on M&A and discusses mergers and acquisitions, their history and related the-

ories, and capital structure and its theories.  

 

This thesis emphasizes M&A transactions conducted in the Nordic countries from the 

acquirer’s perspective. This theoretical perspective aims to provide the foundation for 

understanding how leverage, strategic motives, and transaction structure affect the out-

comes and value creation of such deals. 

 

 

2.1 Mergers and acquisitions 

This chapter explores the theoretical frameworks and practical considerations surround-

ing M&A, focusing on the factors influencing decision-making processes, the integration 

of merged entities, and the outcomes of such transactions. It also explores M&A history. 

By examining the dynamics of M&A, this chapter aims to provide a comprehensive un-

derstanding of its role in corporate strategy and its impact on long-term organizational 

performance. 

 

Mergers and acquisitions are major and transformative events in the corporate world. 

They shape industry landscapes and affect firms' strategic direction. These transactions 

involve consolidating companies or assets to achieve growth, enhance competitive ad-

vantage, or improve financial performance. As businesses operate in an increasingly 

globalized and competitive market, M&A activities offer expansion, diversification, and 

synergy creation opportunities. Therefore, the purpose of mergers and acquisitions is to 

combine several businesses to achieve synergy and maintain or increase the competi-

tiveness and growth of the business. 

 



20 

The terms merger and acquisition are often used interchangeably, though they repre-

sent distinct types of transactions. A merger occurs when two companies agree to form 

a single entity, resulting in both firms losing their independent status. In contrast, an 

acquisition involves one company purchasing another, thereby gaining ownership and 

control over the acquired firm (Hassan et al., 2018). 

 

A merger occurs when two companies combine their operations to form a single, unified 

organization. This strategic move is often motivated by goals such as expanding market 

share, reducing costs, or achieving synergies that enhance efficiency and competitive-

ness (Hargrave, 2021). Conversely, an acquisition involves one company purchasing a 

controlling interest or the entirety of another company’s stock, granting the acquiring 

company control over the target firm. Acquisitions can be friendly or hostile and are typ-

ically pursued to gain access to new markets, technologies, or other strategic resources 

(Kenton, 2020). 

 

 

2.1.1 History of M&A 

The evolution of M&A activity can be traced through a series of distinct waves. Mergers 

and acquisitions have historically followed a cyclical pattern, with merger waves occur-

ring during periods of economic expansion, strong financial markets, and favourable reg-

ulatory conditions, followed by downturns triggered by financial crises, recessions, or 

stricter antitrust enforcement. These waves are influenced by technological advance-

ments, regulatory changes, financial market conditions, and globalization, shaping the 

corporate landscape across industries (Martynova & Renneboog, 2008). Understanding 

this historical development of merger waves is essential for contextualizing the current 

M&A landscape in the Nordic region.  

 

Since this thesis focuses on post-acquisition performance and leverage usage in Nordic 

M&A transactions, recognizing how past merger waves shaped strategic and financial 

decision-making provides a useful framework for evaluating modern-day deals’ motives 



21 

and expected outcomes. Over time, M&A activity has evolved from monopolistic consol-

idations in the early 20th century to complex financial transactions such as leveraged 

buyouts, hostile takeovers, and cross-border acquisitions (Gaughan, 2015). 

 

The literature identifies five major merger waves, primarily originating in the United 

States, with European markets following a similar pattern with a short lag. This time dif-

ference reflects regulatory variations, economic conditions, and the influence of U.S. fi-

nancial markets on global corporate activity (Brakman et al., 2007). 

 

The first merger wave (1897–1904) was driven by horizontal mergers, where firms con-

solidated within industries such as steel, railroads, oil, and banking to achieve monopo-

listic dominance. The lack of strict antitrust enforcement allowed these large-scale con-

solidations to take place. However, increasing public and regulatory pressure led to the 

implementation of the Sherman Antitrust Act, effectively bringing the wave to an end. 

The second wave (1918–1929) saw a shift from monopolistic consolidations to oligopo-

listic structures, as firms focused on economies of scale and vertical integration to 

strengthen their market positions. However, the 1929 stock market crash and the Great 

Depression led to a significant decline in corporate expansion, marking the end of this 

wave (Martynova & Renneboog, 2008). 

 

Following economic recovery after World War II, the third merger wave (1950s–1973) 

emerged, characterized by the rise of conglomerate mergers. Companies sought to di-

versify their business portfolios by acquiring firms in unrelated industries to reduce fi-

nancial risk and enhance corporate stability. Regulatory measures, such as the 1950 Cel-

ler-Kefauver Act, restricted horizontal and vertical mergers, prompting firms to expand 

through diversification instead. However, this strategy lost favour as inefficiencies in 

managing diverse, unrelated businesses became apparent. The 1973 oil crisis and sub-

sequent economic downturn contributed to the decline of conglomerate mergers, bring-

ing this wave to an end (Gaughan, 2015). 

 



22 

The fourth merger wave (1981–1989) saw a fundamental shift from diversification to 

corporate restructuring, hostile takeovers, and leveraged buyouts. The rise of junk bonds, 

pioneered by investment firms, facilitated the financing of highly leveraged acquisitions. 

Aggressive takeovers, restructuring of inefficient conglomerates, and increased share-

holder activism characterized this period. Firms were acquired and restructured to im-

prove financial performance through cost-cutting, divestitures, and asset sales. However, 

the 1987 stock market crash and subsequent tightening of credit markets made financing 

these transactions more difficult, leading to the wave’s decline (Martynova & Renneboog, 

2008). 

 

The fifth merger wave (1993–2000) reflected the rise of globalization, deregulation, and 

technological advancements, leading to large-scale cross-border M&A activity. Unlike 

previous waves that were primarily domestic, this period saw an increase in international 

mergers, particularly in finance, telecommunications, and technology. Firms pursued in-

dustry consolidation and geographic expansion, often engaging in mega-deals to 

strengthen their market positions. Privatizing state-owned enterprises, particularly in 

Europe, and the liberalization of global markets further fuelled M&A activity (Brakman 

et al., 2007). However, the bursting of the dot-com bubble in 2000 caused a sharp decline 

in corporate valuations and investor confidence, marking the end of this wave (Gaughan, 

2015).  

 

In the Nordic context, merger waves have mirrored broader European patterns and ex-

hibited unique features shaped by smaller market size, institutional investor influence, 

and highly integrated welfare models. These regional characteristics may influence the 

frequency and structure of M&A transactions, including how leverage is used to finance 

deals. Therefore, assessing the historical and economic context is essential to under-

standing the buyer’s rationale and the conditions under which value is created. 

 

A notable feature of European M&A activity is its tendency to follow U.S. trends with a 

short delay. Regulatory frameworks, market conditions, and economic integration efforts, 



23 

particularly through the European Union’s single market policies, have influenced the 

timing and nature of European merger waves. While U.S. firms often initiate M&A trends, 

European companies tend to adopt similar strategies once regulatory and economic con-

ditions align (Brakman et al., 2007). 

 

The post-2000 M&A environment has been shaped by digital transformation, private eq-

uity dominance, and increased regulatory scrutiny, particularly concerning conglomerate 

mergers within digital ecosystems. The rise of Big Tech acquisitions and the role of data-

driven business models have brought new challenges to antitrust enforcement. Govern-

ments and regulators are now closely monitoring market power in digital industries, sig-

nalling a shift in corporate strategy and regulatory frameworks moving forward 

(Martynova & Renneboog, 2008). 

 

 

2.1.2 Types of mergers 

Mergers and acquisitions are commonly classified into three types: vertical, horizontal, 

and conglomerate. Vertical mergers occur between companies at different supply chain 

stages, such as a manufacturer acquiring a distributor. Horizontal mergers happen be-

tween competitors within the same industry, while conglomerate mergers involve com-

panies that operate in unrelated markets but combine to diversify their portfolios (Witt, 

2022). 

 

Understanding the differences between these merger types is essential for analysing 

how leverage and value creation mechanisms operate in various acquisition contexts, 

especially from the buyer's perspective in Nordic M&A transactions. However, this study 

does not consider merger types due to data constraints. 

 

A horizontal merger occurs when two companies operating in the same industry and 

market combine to form a single entity. These mergers are primarily driven by the desire 

to increase market share, achieve economies of scale, and reduce competition (Gaughan, 



24 

2015). These mergers typically provide the highest potential for operational synergies, 

but they can also present challenges related to overlapping functions and personnel, 

which may complicate integration. 

 

A vertical merger occurs when companies at different supply chain stages combine, such 

as a manufacturer acquiring a distributor or a supplier merging with a retailer (Gaughan, 

2015). These mergers are typically motivated by efficiency gains, cost reductions, and 

supply chain integration.   

 

A conglomerate merger occurs when two firms operating in unrelated industries or mar-

kets combine. These mergers are often driven by diversification strategies, financial syn-

ergies, and risk reduction (Gaughan, 2015). However, conglomerate mergers have be-

come less common in recent decades, as empirical evidence has questioned their effec-

tiveness in enhancing shareholder value (Gaughan, 2015). 

 

 

2.1.3 M&A strategy 

Strategic decision-making in mergers and acquisitions becomes particularly challenging 

when firms operate under uncertain market conditions. Companies must manage this 

uncertainty while balancing risks, potential synergies, and the timing of their acquisitions 

to optimize long-term value creation. One approach to tackling these challenges is im-

plementing tailored acquisition strategies that align with market conditions and firm ob-

jectives. 

 

Lukas et al. (2019) highlight in their research two primary strategies in M&A: engaging in 

a large-scale acquisition, often referred to as the "big leap", where a firm acquires a large 

target in one major transaction, or pursuing a sequential acquisition program where 

smaller firms are acquired incrementally. The choice between these strategies is influ-

enced by several factors, including the level of market uncertainty, the nature of syner-

gies available, and the firm's strategic priorities (Lukas et al., 2019). For instance, in highly 



25 

volatile markets, firms may find acquisition programs more effective as they allow grad-

ual market entry while mitigating financial and operational risks. In contrast, stable mar-

ket conditions often make the "big leap" approach more attractive due to its ability to 

achieve faster market entry and economies of scale. 

 

Timing is a critical factor influencing the strategic and financial outcomes of M&A trans-

actions. Hostile takeovers may suffer from inefficiencies due to delayed execution, alt-

hough they offer greater control to the acquirer and potentially higher value capture. On 

the other hand, friendly mergers typically allow for smoother negotiations and earlier 

completion, which can preserve or enhance the financial benefits of the transaction (Lu-

kas et al., 2019). These findings highlight the trade-offs firms must consider when de-

signing their acquisition strategies, particularly regarding speed, control, and efficiency. 

 

Designing optimal M&A strategies requires firms to evaluate market conditions carefully, 

assess the level of synergies achievable with potential targets, and consider the implica-

tions of each acquisition within the context of their overall strategic plan. While uncer-

tainty poses inherent challenges, a well-structured approach to M&A can mitigate risks 

and unlock substantial value for acquirers and their stakeholders. 

 

These strategic considerations are particularly relevant to Nordic M&A. Since Nordic 

firms often operate in relatively small but advanced markets, uncertainty in cross-border 

or sector-expanding M&As can be pronounced. Therefore, choosing between a big leap 

and an acquisition program may significantly impact post-acquisition performance.  

 

 

2.1.4 The form and process of M&A 

In addition to strategic motives, M&A transactions involve a complex and multi-stage 

process that influences the deal's success. Understanding the structure and execution of 

such transactions is fundamental to assessing their implications for value creation, par-

ticularly from the acquirer’s perspective.  



26 

The process typically begins with target identification, followed by preliminary negotia-

tions and due diligence, during which the acquiring firm assesses the target's financial, 

legal, and operational aspects. Based on this, a formal deal structure is chosen, com-

monly a share purchase, asset purchase, or merger, depending on legal, tax, and strategic 

considerations (Gaughan, 2015).  

 

Once the terms are agreed upon, a detailed acquisition agreement is signed. This in-

cludes provisions on price, payment method, representations and warranties, and ter-

mination clauses. In cross-border deals, additional attention must be paid to regulatory 

approvals, antitrust clearance, and potential legal or cultural barriers (Martynova & 

Renneboog, 2008).  

 

A critical yet often underestimated phase is post-merger integration, which involves 

combining operations, aligning systems, and managing personnel and cultural integra-

tion. The quality and speed of this phase significantly impact whether anticipated syner-

gies are realized (Gaughan, 2015).  

 

External advisors, such as investment banks, legal counsel, and consultants, are often 

involved throughout the process, especially in complex or high-value transactions. These 

advisors provide expertise in valuation, negotiation, compliance, and integration plan-

ning. 

 

These steps are relevant, as the effectiveness of due diligence and post-merger integra-

tion may directly influence the value creation outcomes. Moreover, deal structure 

choices may be linked to the amount of leverage the acquirer uses. 

 

 

2.2 M&A theories and concepts 

M&A theories and concepts help explain the strategic motivations behind corporate ac-

quisitions. They address the fundamental question of why a firm chooses to pursue an 



27 

acquisition in the first place. By doing so, they establish a logical foundation for under-

standing the acquirer's behaviour before any financing decisions. M&A is grounded in 

multiple theoretical perspectives that seek to explain the motivations behind corporate 

takeovers and their impact on firm performance. No single theory fully captures the 

complexities of M&A transactions. Different theories offer complementary insights into 

these deals' strategic and financial rationale. These theories provide a foundation for 

analysing the effects of M&A on firm value, particularly in the context of leverage and 

long-term performance outcomes. The following outlines key theories for understanding 

value creation, leverage, and performance outcomes in Nordic M&A transactions. 

 

 

2.2.1 Efficiency theory 

Efficiency theory suggests that M&A transactions are primarily undertaken to achieve 

synergies that enhance the combined firm's operational and financial performance. Syn-

ergies can be classified into financial, operational, and managerial efficiencies (Trautwein, 

1990). Financial synergies arise from the cost of capital reductions, risk diversification, 

and improved capital allocation through an internal market. An internal capital market 

allows firms to allocate capital more efficiently by directing resources to divisions with 

the highest expected returns, thereby optimizing financial decision-making. However, 

the ability of firms to achieve financial synergies through M&A depends on the effective-

ness of capital allocation and integration processes. 

 

Operational synergies, on the other hand, result from integrating production processes, 

streamlining supply chains, and optimizing resource allocation (Trautwein, 1990). Firms 

engaged in M&A transactions often seek to eliminate redundant operations, improve 

efficiency in procurement and distribution, and enhance economies of scale. Managerial 

synergies occur when leadership in the acquiring firm successfully implements superior 

management strategies to enhance overall performance. While theoretically valid, real-

izing these efficiencies remains contentious, as empirical evidence suggests that effi-

ciency gains are often difficult to achieve in practice. Challenges such as cultural 



28 

integration, conflicting corporate strategies, and resistance to change can hinder the re-

alization of expected synergies. 

 

 

2.2.2 Concept of synergy 

One of the most cited motivations for mergers and acquisitions is the expectation that 

the combined value of the merging firms will exceed the sum of their values. This antic-

ipated value gain is typically attributed to synergies, such as cost savings, revenue en-

hancements, and improved strategic positioning (Kitching, 1967). Synergies are espe-

cially relevant in horizontal and vertical mergers, where economies of scale, scope, and 

increased bargaining power can provide competitive advantages. Financial mergers of-

ten benefit from tax optimization and debt restructuring and may offer the most imme-

diate gains. In cross-border M&A, for example, synergies may arise through access to 

new markets, integration of international operations, and shared technological capabil-

ities.  

 

However, Kitching (1967) argues that while these synergies are frequently presented as 

justification for deals, they are often difficult to achieve in practice. Many firms overes-

timate the ease of realizing synergies, leading to disappointing post-merger outcomes 

such as underperformance and unforeseen integration costs. The success of synergy re-

alization depends heavily on the effectiveness of post-merger integration, industry-spe-

cific conditions, and external factors such as macroeconomic volatility and regulatory 

change. 

 

 

2.2.3 Firm size 

Gorton et al. (2009) propose that firms prefer acquiring smaller targets due to the com-

plexity and risks associated with large-scale transactions. Acquiring a significantly larger 

firm requires substantial financial resources, often increasing leverage and default risk. 



29 

Furthermore, large deals introduce operational challenges, cultural mismatches, and 

regulatory scrutiny, all elevating the likelihood of failure (Eisenbarth & Meckl, 2014). Fi-

nancially, firms engaging in high-leverage M&A must balance debt servicing capacity 

with expected value creation to avoid financial distress. 

 

The complexity of significant M&A transactions can also impact post-merger integration 

efforts. Larger acquisitions typically require extensive restructuring, workforce adjust-

ments, and alignment of corporate cultures, all of which contribute to increased execu-

tion risk. As a result, firms engaging in large-scale M&A must adopt comprehensive risk 

management strategies to ensure long-term success. 

 

 

2.2.4 Empire-building theory 

Empire-building theory suggests that managers pursue acquisitions to increase firm size 

and personal power rather than maximize shareholder value (Trautwein, 1990). This the-

ory is based on agency theory and highlights conflicts of interest between managers and 

shareholders. Managers seeking to enhance their influence and compensation may en-

gage in value-destroying acquisitions that dilute shareholder returns (Mueller, 1969). 

Empirical studies have shown that empire-building motives are often more pronounced 

in firms with weak governance structures, where shareholder interests less constrain 

managerial decision-making. 

 

Given the limited empirical support for sustained short-term performance improve-

ments following empire-driven acquisitions, this theory highlights the importance of 

strong corporate governance mechanisms in limiting managerial excesses. M&A trans-

actions motivated by empire-building are more likely to result in post-merger inefficien-

cies, excessive leverage, and poor financial performance over time. Regulatory oversight 

and shareholder activism can prevent empire-building by ensuring that M&A decisions 

align with short-term value-creation objectives. 

 



30 

2.2.5 Hubris hypothesis 

The hubris hypothesis (Roll, 1986) argues that M&A decisions are frequently driven by 

managerial overconfidence rather than rational value-maximizing motives. Overconfi-

dent CEOs overestimate synergies and, as a result, tend to overpay for acquisitions, lead-

ing to value destruction. This phenomenon is closely linked to the winner’s curse, which 

suggests that the acquiring firm often suffers post-merger performance declines due to 

inflated acquisition prices and underestimated integration costs (Varaiya, 1988).  

 

Managerial hubris can manifest in various ways, including an excessive focus on deal 

completion rather than long-term strategic fit. Research further supports that CEO char-

acteristics such as overconfidence, dominance, and risk-taking behaviour significantly in-

fluence acquisition decisions. Malmendier and Tate (2005) demonstrate that overconfi-

dent CEOs are more likely to pursue value-destroying mergers. Brown and Sarma (2007) 

show that dominant executives exhibit a greater propensity for aggressive deal-making, 

often at the expense of shareholder value. 

 

Strong corporate governance mechanisms, such as independent boards and active 

shareholder engagement, can play a critical role in mitigating the adverse effects of man-

agerial hubris in M&A transactions by ensuring alignment with long-term value-creation 

objectives. 

 

 

2.3 Capital structure theories 

Given that many M&A transactions are financed through external sources, debt in par-

ticular, understanding the theoretical foundations of capital structure is essential for as-

sessing how Nordic acquirers make financing decisions in corporate takeovers. Several 

prominent theories have been developed to explain capital structure decisions, in addi-

tion to considering firm-specific characteristics. 

 



31 

2.3.1 Modigliani-Miller theorem 

Modigliani and Miller's (1958) capital structure irrelevance proposition takes a funda-

mentally different view. Under the assumption of perfect markets, where there are no 

taxes, transaction costs, or information asymmetry, the theory suggests that a firm's cap-

ital structure does not impact its value. This implies that the choice between debt and 

equity is irrelevant because investors can replicate a firm’s financial decisions by adjust-

ing their own leverage. While this proposition provides a theoretical benchmark, real-

world frictions such as tax benefits, bankruptcy risks, and information asymmetry have 

led to the development of alternative theories that better explain observed financing 

behaviours.  

 

The original theory is criticized for its reliance on impractical assumptions, such as the 

existence of perfectly competitive markets and identical tax treatment for all financing 

methods. In response to these concerns, Modigliani and Miller updated their framework 

in 1963, incorporating the concept of a tax shield from corporate income taxes. This ad-

justment offered a more realistic and nuanced view of how firms might determine an 

optimal capital structure. 

 

 

2.3.2 Trade-off theory 

The trade-off theory is based on the Modigliani and Miller theorem. It is developed by 

Kraus and Litzenberger (1973).  It proposes that firms aim to determine an optimal mix 

of debt and equity by balancing the benefits and costs associated with debt financing. 

On one hand, debt offers tax advantages through the deductibility of interest payments, 

which creates a tax shield that can enhance firm value. On the other hand, increasing 

debt levels also introduce costs of financial distress, such as a higher risk of bankruptcy 

and potential agency conflicts between shareholders and creditors. The theory is typi-

cally discussed in two forms. The static trade-off theory assumes that firms identify a 

target capital structure by weighing these trade-offs at a single point in time, without 



32 

considering future financing needs. In contrast, the dynamic trade-off theory acknowl-

edges that firms operate in imperfect markets and may temporarily deviate from their 

target leverage but gradually adjust their capital structure in response to changing con-

ditions. This dynamic perspective offers a more realistic framework by incorporating the 

timing of financing decisions and the firm’s ability to adapt to market fluctuations. 

 

A key implication of this theory is its relevance in M&A. Acquisitions can serve as a mech-

anism for target firms to overcome transaction costs that might otherwise hinder their 

capital structure adjustments. Firms involved in M&A transactions often use leverage 

strategically, aligning with research by Flannery et al. (2023), Harford et al. (2009), and 

Uysal (2011), which highlights the role of leverage adjustments in corporate finance 

strategy. By optimizing their capital structure through acquisitions, firms can achieve fi-

nancial flexibility while managing the risks associated with excessive debt or underuti-

lized tax shields. 

 

 

2.3.3 Pecking order theory 

The pecking order theory, proposed by Myers and Majluf (1984), offers an alternative 

view to the trade-off theory by emphasizing the role of information asymmetry in financ-

ing decisions. According to this theory, companies do not actively target an optimal cap-

ital structure. Instead, they follow a hierarchy of financing preferences, prioritizing inter-

nal funds first, then debt, and only turning to equity at last. 

 

This financing order reflects that external financing, particularly equity, can signal nega-

tive information to the market, potentially diluting firm value. Therefore, firms tend to 

rely on retained earnings whenever possible. Debt financing is typically preferred if in-

ternal funds are insufficient due to its relatively lower sensitivity to information gaps and 

the tax advantages associated with interest deductibility. 

 



33 

However, the application of this theory is not always straightforward. Even firms with 

substantial cash reserves may use debt if market conditions allow access to inexpensive 

leverage. This enables companies to preserve liquidity for strategic investments or oper-

ational flexibility. In practice, firms may balance between internal funds and debt, opti-

mizing capital allocation while managing the adverse effects of information asymmetry. 

 

 

2.3.4 Market timing theory 

The market timing theory, developed by Baker and Wurgler (2002), suggests that firms 

make capital structure decisions based on the current conditions in the capital markets. 

If equity valuations are high, firms may issue shares. If interest rates are low, they may 

favour debt. This theory shifts the focus from firm-specific factors to external, time-sen-

sitive opportunities. 

 

In the Nordic M&A landscape, market timing plays an increasingly relevant role. During 

periods of low interest rates, such as the post-financial crisis years of 2008 or recent 

years of expansionary monetary policy, firms tend to take advantage of cheap debt to 

fund acquisitions. This opportunistic behaviour is particularly visible among larger listed 

companies or conglomerates with better access to capital markets. Moreover, negative 

interest rates and highly liquid bond markets in certain periods have lowered the thresh-

old for firms to consider debt-financed takeovers, making market conditions a decisive 

factor in acquisition financing. 

 

 

2.3.5 Agency problem theory 

Agency theory, as introduced by Jensen and Meckling (1976), explains the conflicts that 

can arise between firm owners (principals) and the managers (agents) who are entrusted 

to act on their behalf. In the context of corporate acquisitions, this conflict may surface 



34 

when managerial incentives are not perfectly aligned with shareholder interests, poten-

tially leading to suboptimal investment decisions. 

 

One of the central ideas in this theory is that managers may be incentivized to engage in 

acquisitions that serve their objectives, such as empire-building or increasing personal 

power, even if these transactions do not maximize shareholder value. This risk increases 

when managers are not fully exposed to the consequences of their decisions, particularly 

in firms with dispersed ownership or weak oversight. 

 

Financial leverage can play a dual role in mitigating agency problems. On one hand, high 

leverage levels reduce the amount of free cash flow available for discretionary spending, 

limiting the managers’ ability to pursue value-destroying acquisitions. On the other hand, 

excessive leverage may introduce new risks, including financial distress and short-

termism, particularly if acquisitions are motivated by market pressure or overconfidence. 

 

In Nordic M&A transactions, the acquirer's capital structure can reflect attempts to bal-

ance these agency costs. For example, choosing to finance a deal with debt may signal a 

commitment to discipline and value creation, while equity-financed deals might raise 

concerns about dilution and managerial motives. Consequently, leverage decisions in ac-

quisitions can be interpreted as part of a broader mechanism to manage agency conflicts 

and ensure alignment between ownership and control. 

 

 

2.3.6 Free cash flow theory 

The free cash flow theory, introduced by Jensen (1986), offers a framework for under-

standing why firms with strong internal cash generation may choose to finance acquisi-

tions through debt. According to Jensen (1986), free cash flow refers to the cash available 

after funding all positive net present value projects. In situations where profitable in-

vestment opportunities are limited, excess liquidity can lead to inefficient capital 



35 

allocation, as managers may pursue projects that serve their own interests rather than 

those of shareholders. 

 

In this framework, debt serves as a disciplinary mechanism. It reduces the cash under 

managerial discretion by creating fixed financial obligations that must be met. This con-

straint helps mitigate the agency problem by limiting opportunities for empire-building 

and enforcing more prudent, value-focused financial behaviour. Essentially, leverage 

pressures managers to allocate capital efficiently and in ways that enhance shareholder 

value. 

 

In Nordic M&A transactions, the free cash flow theory explains why acquiring firms may 

intentionally use leverage, even when internal funds are available. The threat of agency 

costs may be more pronounced, especially in mature industries or cross-border deals, 

where integration risks and organizational complexity increase. Leveraged financing can 

signal managerial discipline and a commitment to post-acquisition efficiency. 

 

Supporting this perspective, Myers (2001) highlights that free cash flow problems are 

most significant in firms with stable earnings and limited growth opportunities, precisely 

the type of firms often engaged in strategic acquisitions. He notes that using debt can, 

under such conditions, contribute to firm value even when it introduces moderate finan-

cial risk, as long as the firm’s operating cash flows substantially exceed viable reinvest-

ment needs. 

 

 

2.4 The role of leverage in M&A 

Harford et al. (2009), in their findings on financing decisions in large acquisitions, suggest 

that firms actively strive to minimize deviations from their target debt levels. The re-

search indicates that following cash-financed acquisitions, firms deliberately adjust their 

leverage back toward the target, supporting the static trade-off theory's prediction that 

companies maintain leverage targets. 



36 

Furthermore, the results of Harford et al. (2009) emphasize that efforts to reduce con-

tracting costs are key determinants in firms' decisions to sustain a target capital structure. 

Their findings also offer valuable insights into the factors that influence the choice of 

payment method in takeover transactions. 

 

Although the payment method is closely tied to the financing strategy of the acquisition, 

existing evidence on the extent to which firms consider their pre-acquisition leverage 

and the potential leverage changes resulting from the transaction remains limited. Har-

ford et al.'s research (2009) suggests that capital structure considerations are a signifi-

cant factor in the decision-making process regarding the chosen payment method. 

 

Harford et al. (2009) provide evidence regarding target capital structures among firms in 

the context of large acquisitions. Their findings indicate that when a bidder’s leverage 

exceeds its target level, the firm is less likely to finance the acquisition with debt and 

more inclined to use equity instead. Furthermore, a positive relationship is identified 

between merger-induced changes in target and actual leverage, with bidders incorpo-

rating more than two-thirds of the change into the merged firm’s new target leverage. 

 

Harford et al.’s (2009) research also demonstrates that following debt-financed acquisi-

tions, managers actively adjust the firm’s leverage back toward its target, reversing over 

75% of the acquisition's leverage impact within five years. These findings support the 

view that firms adhere to a capital structure model that incorporates both a target lev-

erage level and adjustment costs. The results further suggest that deviations from target 

leverage significantly influence financing decisions in acquisition transactions, reinforc-

ing the strategic role of capital structure management. 

 

 



37 

2.5 Buyer returns and value creation 

2.5.1 Financial synergies and the leverage effect 

When analysing buyers’ returns and value creation, Leland (2007) indicates that the lev-

erage effect represents the difference in leverage-related benefits when business activi-

ties are combined within a single firm versus when they remain separate entities. This 

effect can be broken down into two components: the change in tax savings from leverage 

and the change in default costs when comparing the outcomes of merging versus oper-

ating separately. 

 

Merging activities into a single firm offers the benefit of risk reduction through diversifi-

cation, while maintaining separate entities allows firms to optimize individual capital 

structures. As a general guideline, the leverage effect tends to be positive when the com-

bined firm's optimal debt value exceeds the sum of the optimal debt values of the sep-

arate entities. Conversely, the effect is typically negative if the merged firm’s optimal 

debt value falls below the combined debt values of the individual firms. 

 

Financial synergies resulting from mergers are more likely to be positive when the in-

volved firms exhibit low correlations and when their volatilities are both low and similar. 

Additionally, mergers become more attractive when default costs are jointly high, as the 

enhanced risk reduction from diversification increases firm value. Conversely, substantial 

differences in the volatility or default costs of the firms' activities tend to favour main-

taining them as separate entities. 

 

According to Leland (2007), these findings have implications for empirical research on 

merger gains and merger activity predictions. Factors such as cash flow characteristics 

contributing to financial synergies should be considered potential explanatory variables. 

Moreover, the results suggest that mergers can have distinct impacts on debt and equity 

values. 

 



38 

While financial synergies alone may often be insufficient to justify mergers, their im-

portance can increase under specific conditions. Cases calibrated to empirical data 

demonstrate that financial synergies can become meaningful in specialized scenarios de-

spite being generally modest in scale. 

 

 

2.5.2 Broader merger theories 

Trautwein (1990) analyses seven different kinds of merger theories, some of which are 

partially presented in sub-chapter 2.2. Efficiency theory is composed of three types of 

synergies: financial synergies, operational synergies, and managerial synergies. 

 

Financial synergies are achieved by reducing the cost of capital. This can be accomplished 

through several means. One method involves lowering the systematic risk of a compa-

ny's investment portfolio by investing in unrelated businesses. Another method is in-

creasing the company's size, which may provide access to cheaper capital. Additionally, 

establishing an internal capital market, where capital can be allocated more efficiently, 

is a viable approach. Operational synergies are derived from combining previously sep-

arate business units or from knowledge transfers. Both approaches can potentially re-

duce the costs associated with the involved business units or enable the provision of 

unique products and services. However, these advantages must be carefully weighed 

against the associated costs when combining assets. Managerial synergies are realized 

when the acquiring firm's managers possess superior planning and monitoring abilities 

that enhance the target company's performance. Positive motivational outcomes may 

also be observed as a secondary effect. 

 

The second theory, the Monopoly theory, states that mergers are undertaken to achieve 

market power. This theory does not apply in the context of horizontal acquisitions. Mar-

ket power is pursued through cross-subsidies, restricting competition, or deterring po-

tential market entrants. Trautwein (1990) suggests that the empirical record supporting 

the monopoly theory is weaker than that supporting the efficiency theory. 



39 

The third theory is the Valuation theory, which proposes that mergers are initiated and 

executed by managers who possess superior information regarding the target company's 

value compared to the stock market. Managers may identify potential advantages from 

the combination of companies or recognize an undervalued firm that can be sold in parts 

for profit. 

 

The fourth theory is the Empire-building theory, which argues that mergers are initiated 

by managers seeking to maximize their utility rather than acting in the best interests of 

shareholders. This behaviour is often associated with attempts to demonstrate and ex-

pand personal influence and power. 

 

The fifth theory, the Process theory, is also considered a viable explanation for mergers, 

though it has been characterized as ambiguous. Its foundations lie in the strategic deci-

sion-making process, and the available evidence broadly supports its claims. 

 

The sixth theory is the Raider theory, which suggests that mergers are motivated by the 

intention to facilitate wealth transfers from shareholders, often through mechanisms 

such as greenmail or excessive compensation following a takeover. Although this theory 

is partially inconsistent, as raiders must pay a premium to other shareholders, empirical 

evidence indicates that raiders have generally not been successful. Nevertheless, share-

holder gains have been observed in most cases following mergers. 

 

Finally, the Disturbance theory attributes mergers to economic disturbances. However, 

the absence of institutional frameworks for such mergers and weak data correlations 

between this theory and real-life events limits its explanatory power. 

 

Trautwein (1990) concludes that the valuation, empire-building, and process theories of 

mergers have the highest degree of credibility. Although the supporting evidence is fa-

vourable, it remains significantly limited. Efficiency and monopoly theories follow, with 



40 

a more significant body of largely unfavourable evidence. Lastly, the raider and disturb-

ance theories are regarded as the least credible, with minimal supporting evidence. 

 

These theories provide a solid theoretical background for this study. Efficiency and 

valuation theories are particularly relevant, suggesting that acquisitions, especially those 

involving leverage, may generate financial or operational synergies and reflect informed 

managerial decisions based on superior valuation insights. These theories align with the 

central premise of this thesis, which investigates whether leveraged acquisitions lead to 

superior long-term performance. However, empire-building and raider theory offer 

contrasting perspectives, implying that leverage might also serve managerial self-

interest or facilitate value transfers, potentially leading to underperformance. 

 



41 

3 Literature review 

3.1 Leverage in M&A 

An increasing number of studies highlight how capital structure decisions affect acquisi-

tion choices, deal structure, and post-acquisition performance, emphasizing the im-

portance of financial flexibility and optimal leverage management (Ang et al., 2018; 

Uysal, 2011). 

 

Firms often approach M&A, focusing on balancing the benefits and costs associated with 

debt. According to Uysal (2011), overleveraged firms face constraints in financing acqui-

sitions, often avoiding cash-based transactions and paying lower premiums due to lim-

ited borrowing capacity. Conversely, underleveraged firms exhibit greater flexibility, lev-

eraging their financial position to pursue strategic acquisitions. This contrast emphasizes 

the significance of maintaining an optimal capital structure, as deviations from target 

leverage levels can restrict strategic options and impact acquisition outcomes. Harford 

et al. (2009) extend this view, demonstrating that firms with a target-oriented approach 

to capital structure are better equipped to align financing choices with strategic objec-

tives, ensuring both short-term feasibility and long-term growth. 

 

Research further demonstrates that capital structure adjustments are not confined to 

the pre-acquisition phase. Harford et al. (2009) find that firms actively rebalance their 

leverage following acquisitions, with many returning to target levels within five years. 

This rebalancing process reflects the dynamic interplay between strategic investment 

decisions and capital structure optimization. Ang et al. (2018) complement these find-

ings by highlighting the value-enhancing potential of increased debt capacity, showing 

that acquirers benefit from improved long-term stock market performance when post-

merger leverage is optimized. The ability to adjust leverage dynamically enables firms to 

maintain financial stability and capitalize on emerging opportunities, mitigating risks as-

sociated with suboptimal debt levels. 

 



42 

Kruk (2021) analyses the capital structure of M&A deals and considers that, in the liter-

ature on the subject, no full agreement has been reached regarding the definition of the 

concept of capital structure. Attention is typically directed toward the equity-to-debt ra-

tio in this context. On some occasions, the term is interpreted as a liability structure, 

while another approach distinguishes between the concepts of financing structure and 

capital structure. In this regard, capital structure is considered to include equity and long-

term liabilities and is viewed as a component of the financing structure, which also in-

cludes current liabilities. The concept of enterprise value is likewise subject to various 

interpretations. Within the capital structure theory, it is assumed that this value corre-

sponds to the amount a buyer is prepared to pay in exchange for anticipated cash flows. 

Thus, it is determined by the sum of future discounted cash flows. 

 

According to Kruk (2021), the capital structure is understood to comprise equity derived 

from the issuance of shares, preferred capital, and long-term debt. In this context, the 

capital structure is regarded as a component of the financing structure. The financing 

structure is defined to include equity, long-term external capital, and current liabilities. 

Therefore, the capital structure corresponds to the structure of liabilities excluding cur-

rent liabilities. The exclusion of current liabilities from consideration is attributed to their 

fluctuating value. As a result, the capital structure is determined by equity and long-term 

liabilities over the long term. 

 

When analysing the optimal leverage in M&A and considering the variety of financial 

instruments available, it can be assumed that the possibilities for shaping the capital 

structure are unlimited, as this relationship may assume values ranging from zero to in-

finity. Determining the existence of an optimal capital structure would imply that share-

holder value can be maximized through the appropriate adjustment of a company's cap-

ital structure. Consequently, a company's value would be influenced not only by its in-

vestment decisions but also by its financial decisions. 

 



43 

Durand (1952) presents a compromise theory, which is regarded as a combination of the 

theory of operating profit and the theory of net profit. According to this theory, debt is 

accepted by the owners of a company up to a certain level without the expectation of 

an additional risk premium. As a result, the weighted average cost of capital is reduced, 

and the company's market value increases if the proportion of debt remains within an 

acceptable limit. However, once this acceptable level is exceeded, equity and external 

capital providers are expected to demand a higher risk premium. Consequently, the 

weighted average cost of capital will rise, leading to a decrease in the enterprise's market 

value. 

 

 

3.1.1 Credit rating and leverage decisions 

Credit ratings have generally received limited attention in theoretical and empirical cap-

ital structure models within academic studies. However, several studies have incorpo-

rated variables that capture both a firm's target leverage and the impact of adjustment 

costs on leverage dynamics only in recent years. 

 

Credit ratings add another layer of complexity to the relationship between capital struc-

ture and M&A. Aktas et al. (2021) identify a curvilinear relationship between credit rat-

ings and acquisition likelihood, noting that highly rated firms often exercise caution to 

avoid downgrades, while lower-rated firms take advantage of relaxed borrowing con-

straints to pursue acquisitions. These dynamics suggest that credit ratings influence the 

frequency and structure of acquisitions and post-deal integration strategies. Firms with 

high ratings often prioritize conservative financial strategies to preserve their status. In 

contrast, those with lower ratings may adopt more aggressive acquisition tactics to im-

prove market position and shareholder value. 

 

Recent research emphasizes the importance of credit ratings in shaping firms' capital 

structure decisions. Kisgen (2009) highlights that firms adjust their leverage behaviour 

in response to changes in credit ratings, particularly after downgrades. The study reveals 



44 

that firms significantly reduce leverage after downgrades to speculative grade levels to 

regain favourable credit ratings, while upgrades have little impact on subsequent lever-

age decisions. This asymmetry suggests that firms prioritize maintaining minimum credit 

ratings due to their influence on debt costs, investor access, and financial flexibility. 

These findings expand the traditional view of leverage optimization by incorporating the 

strategic importance of credit ratings in corporate financial behaviour. 

 

In summary, it can be concluded that a company with a good credit rating benefits from 

more favourable and advantageous debt terms, which lowers the barrier to utilizing fi-

nancial leverage and may increase the proportion of relative debt. Furthermore, it is im-

portant for corporate management, as part of corporate restructuring, to consider credit 

rating maintenance in their communication and calculations. Ensuring that the credit 

rating does not decline is important, as a downgrade can significantly negatively affect 

the company's ability to obtain debt, the cost of debt, and the project’s overall profita-

bility. 

 

 

3.1.2 Leverage in cross-border transactions 

Recent studies emphasize the critical role of leverage in shaping firms’ decisions in cross-

border M&As. Overleveraged firms face significant financial constraints that limit their 

ability to pursue acquisitions, pay acquisition premiums, or make all-cash offers, as cred-

itors are less inclined to extend additional debt to such firms (Hu & Yang, 2016). Con-

versely, firms with lower leverage are more attractive acquisition targets and more flex-

ible in structuring deals. Furthermore, post-acquisition firms tend to adjust their capital 

structures, overleveraged firms reduce debt by issuing equity, while underleveraged 

firms increase leverage to optimize their capital structures. These dynamics highlight the 

interdependence between financing and investment decisions, particularly in cross-bor-

der transactions. 

 



45 

Macroeconomic factors also significantly shape capital structure decisions during M&A. 

Kruk (2021) highlights the influence of interest rates, credit availability, and economic 

stability on leverage strategies. Periods of low interest rates may incentivize firms to in-

crease leverage, while restrictive credit markets can constrain acquisition financing op-

tions. Cross-border M&A introduces additional complexities, such as exchange rate vol-

atility, regulatory hurdles, and differences in financial reporting standards. These factors 

necessitate careful consideration of capital structure to ensure alignment with strategic 

goals and market conditions. 

 

Leverage is critical in cross-border mergers and acquisitions, influencing the parties' fi-

nancial performance and integration outcomes. Cioli et al. (2020) investigate how cross-

border M&A affects the financial dynamics of bidder and target firms. Their findings 

highlight that leverage patterns vary significantly between the two groups post-acquisi-

tion. While bidder companies generally maintain stable leverage levels after the trans-

action, target firms experience increased leverage within three years. This trend reflects 

the financial strain often encountered by target firms during the integration process and 

the strategic use of debt by acquirers to optimize the transaction's financial structure. 

 

Another key insight is the relationship between leverage and macroeconomic differ-

ences. Firms engaged in cross-border M&A must manage challenges such as economic 

disparities and regulatory complexities. Wider gaps in per capita GDP between the bid-

der's and target's countries can complicate deal execution and affect financial outcomes, 

particularly how debt is structured and managed. 

 

These findings emphasize the strategic importance of leveraging financial resources ef-

fectively in cross-border transactions. Maintaining optimal leverage ratios, particularly 

for bidders, is critical to post-acquisition performance. Furthermore, these dynamics un-

derline the importance of financial planning and integration strategies to ensure long-

term success in cross-border M&A. 

 



46 

According to Rose et al. (2017), the difference between domestic and international 

growth may influence the price reaction upon announcement. Several advantages have 

been identified concerning general foreign direct investments and cross-border acquisi-

tions. The motives for cross-border acquisitions are often associated with increasing or 

protecting market share, expanding geographical presence, acquiring new products or 

services, or even achieving economies of scale. However, various obstacles must also be 

addressed, including differences in political and economic environments, disparities in 

both culture and traditions, and in taxation and accounting practices.  

 

Rose et al. (2017) also conclude that, in line with the growing interest in cross-border 

transactions, the difference between acquiring foreign and domestic targets was inves-

tigated. The results indicate that the average announcement returns are lower for cross-

border M&A events. However, the calculated differences are not found to be significantly 

different from zero. For targets acquired by foreign companies, insignificantly higher re-

turns are observed. 

 

On the other hand, in an American sample, Hazelkorn and Zenner (2004) find that ac-

quirers engaging in cross-border transactions are more successful than those acquiring 

domestic targets. They attribute their findings to the possibility of broader geographic 

coverage and access to both local technological expertise and low-cost production facil-

ities. 

 

 

3.1.3 Capital structure and target firms in M&A 

The capital structure of target firms is central to the context of M&A. Flannery et al. 

(2023) provide empirical evidence that target firms’ leverage levels significantly influ-

ence their likelihood of being acquired and their post-acquisition capital structure ad-

justments. Their analysis of 6,083 European target firms between 1999 and 2015 reveals 

that firms with substantial deviations from their optimal leverage levels are more likely 



47 

to become acquisition targets. This suggests that acquiring firms see potential value in 

adjusting the capital structure of mis-leveraged targets to align with optimal levels. 

 

The role of leverage in mergers and acquisitions has been extensively studied, particu-

larly in its influence on premiums, timing, and overall deal structure. Pires and Pereira 

(2020) explore the dynamics of leveraged acquisitions through a dynamic real options 

framework, highlighting that leveraged acquisitions occur sooner and lead to higher pre-

miums for target firms compared to transactions financed entirely with equity. This ac-

celeration effect is attributed to the benefits of debt financing, such as tax shields and 

increased financial flexibility for the bidder. By optimizing leverage, acquirers can max-

imize the transaction's value while expediting the acquisition process. The study further 

demonstrates that leverage decisions are closely tied to the perceived synergies of the 

acquisition. Firms with higher growth prospects are more likely to use debt, as the addi-

tional value created justifies the associated risks. However, the relationship between lev-

erage and market volatility is nuanced. While higher uncertainty can encourage greater 

leverage when bankruptcy costs are low, the opposite occurs when bankruptcy risks are 

significant, as high bankruptcy costs discourage the use of debt. This finding emphasizes 

the need for firms to carefully assess their financial environment when structuring M&A 

deals. 

 

Timing and premiums are also shown to be interdependent in leveraged acquisitions. 

Pires and Pereira (2020) find that acquirers using debt tend to offer higher premiums to 

target shareholders, which accelerates deal completion. This dynamic is absent in equity-

financed transactions, where premiums are lower, and deals are often delayed. Addi-

tionally, taxation emerges as a critical factor in leveraged M&A. Higher tax rates increase 

the attractiveness of debt financing, as firms can benefit from larger tax shields, thereby 

justifying higher premiums and earlier acquisitions. Conversely, in transactions without 

leverage, taxation has a limited impact on premiums but is a deterrent to the timing of 

acquisitions. 

 



48 

These findings highlight the complex role of leverage in shaping M&A outcomes. By 

providing a clear framework for understanding the interplay between financing decisions, 

market conditions, and strategic goals, the work of Pires and Pereira (2020) contributes 

valuable insights into optimizing capital structure in M&A transactions. The results high-

light the importance of aligning leverage levels with the acquirer's strategic objectives 

and the target's financial characteristics, ensuring that the timing, premium, and financ-

ing structure create value for all parties involved. 

 

The relationship between capital structure and mergers and acquisitions has been 

widely studied, focusing on how debt capacity influences acquisition decisions and post-

transaction outcomes. Ang et al. (2019) provide evidence that firms often use M&A as a 

strategic tool to optimize their capital structure. Overleveraged acquirers, for instance, 

actively pursue mergers that improve debt capacity, as this alleviates financial con-

straints and reduces the costs associated with financial distress. The study demonstrates 

that these firms are willing to pay higher acquisition premiums when a transaction allows 

them to rebalance their leverage closer to optimal levels, highlighting the strategic value 

of financial flexibility in corporate takeovers. 

 

In contrast, underleveraged firms focus less on debt capacity and more on market timing, 

particularly by using equity financing when their stock is overvalued. This distinction il-

lustrates the nuanced influence of pre-merger leverage levels on shaping M&A strategies 

and valuation approaches. Furthermore, the authors observe that while market reac-

tions to these transactions are often neutral in the short term, the long-term perfor-

mance of firms improves significantly, particularly for those that successfully enhance 

their debt capacity through the merger. 

 

These findings align with broader capital structure theories, such as the trade-off theory, 

by emphasizing the benefits of achieving an optimal leverage ratio. Additionally, they 

highlight the importance of aligning M&A objectives with financial strategy, particularly 



49 

for firms seeking to mitigate the risks of overleveraging while unlocking growth oppor-

tunities. 

 

 

3.1.4 Adjustment to target leverage post-acquisition 

Flannery et al. (2023) find that acquired firms adjust their leverage rapidly toward opti-

mal levels after an acquisition. Over-leveraged firms, which start with a mean debt-to-

assets ratio of 34.1%, reduce their leverage to 20% within a year of acquisition. Similarly, 

underleveraged firms, starting at 10%, increase their leverage to 18.5%.  

 

These adjustments highlight the relaxation of financial constraints after the acquisition. 

The acquiring firm provides access to broader financial resources, enabling the target to 

optimize its capital structure. 

 

 

3.1.5 Implications for acquirers and target selection 

Flannery et al. (2023) highlight that acquiring firms strategically target misleveraged 

firms, as these offer opportunities for value creation through capital structure optimiza-

tion. Over-leveraged firms, which are more constrained financially, are particularly at-

tractive due to the potential for significant improvements in their capital structure.  

 

Acquirers' ability to efficiently adjust the leverage of target firms emphasizes the im-

portance of financial flexibility and strategic capital management in successful M&A 

transactions. 

 

 

3.2 Buyer return optimals and value creation 

Recent evidence demonstrates that M&A transactions have created more value for ac-

quiring shareholders in the post-2008 financial crisis era. Alexandridis et al. (2017) find 



50 

that acquisitions, particularly "mega-deals" valued at $500 million or more, have mark-

edly improved shareholder returns. Public acquisitions, which historically tended to de-

stroy shareholder value, now exhibit significant positive abnormal returns for acquiring 

firms. This shift can be attributed to advancements in corporate governance, including 

stronger internal controls, greater board independence, and enhanced incentive align-

ment mechanisms. The study also highlights that threefold synergy gains tripled during 

the 2010–2015 period compared to prior decades, indicating a fundamental shift in the 

strategic selection and integration of M&A deals. These insights emphasize the evolving 

nature of M&A transactions and their potential for value creation in a post-crisis regula-

tory environment. 

 

The acquirers’ ability to realize synergies and create value post-acquisition depends on 

their financial health and the quality of their strategic decisions. Alhenawi and Stilwell 

(2017) argue that the pre-acquisition financial conditions of the acquiring and target 

firms play a critical role in determining the success of M&A transactions. Their findings 

emphasize the need for comprehensive financial planning and risk management to max-

imize value creation and minimize potential downsides. Effective integration planning, 

informed by comprehensive financial analyses, further enhances the likelihood of 

achieving desired outcomes. 

 

 

3.3 M&A outcomes and value creation 

Rose et al. (2017) study the value drivers in Nordic mergers and acquisitions. In the text, 

they bring up a conventional wisdom indicating that nearly 50% of deals do not generate 

value. Naturally, all the transactions impact both the buyer and the seller company. 

 

 



51 

3.3.1 Target versus bidder returns 

There are several studies that indicate the fact that in most of the cases the companies 

which are making the bids and are on the buy-side of the deal do seldom gain any ab-

normal returns.  

 

Campa et al. (2004) examine the value generated to shareholders by the announcement 

of mergers and acquisitions involving firms in the European Union over the period 1998-

2000. Cumulative abnormal shareholder returns resulting from merger announcements 

reflect revised expectations regarding future synergies or wealth redistribution among 

stakeholders. 

 

A statistically significant cumulative abnormal return of 9% is observed for target firm 

shareholders within a one-month window centred on the announcement date. Con-

versely, the cumulative abnormal returns for acquiring firms are found to be null on av-

erage. 

 

The evidence is much more consistent and reliable when analysing value creation from 

the target shareholders' point of view. Most previous studies examining abnormal re-

turns for bidding firms have also investigated the effect of M&As on target firms. It has 

been unanimously found that target company shareholders reap significant benefits 

from the sizable takeover premiums. Franks and Harris (1989) report that UK targets be-

tween 1955 and 1985 experienced a statistically significant average abnormal return of 

23.3%. By examining a sample of 138 US acquirers over 9 years (1990-1999), Mulherin 

and Boone (2000) identify a significant cumulative average abnormal return of 20.2% 

within a short period following the announcement. 

 

 



52 

3.3.2 Factors influencing value creation 

Further studies have reinforced these findings. It has been demonstrated that target firm 

shareholders generally benefit from M&A transactions, particularly when cash offers are 

made, as opposed to stock-based deals. The increased certainty associated with cash 

payments is believed to contribute to this effect. Additionally, research has indicated that 

competitive bidding environments tend to enhance the premiums target shareholders 

receive, further improving their returns. Regulatory frameworks, particularly in cross-

border deals, have also been found to influence value creation outcomes, with stricter 

regulations often reducing the likelihood of excessive premiums. 

 

When mergers are categorized by geographical and sectoral dimensions, studies show 

that transactions in formerly state-controlled or heavily regulated industries tend to gen-

erate less value than M&A announcements in unregulated sectors. This diminished value 

creation in regulated industries is shown to become significantly negative when mergers 

involve firms from different countries. The reduced value is primarily attributed to the 

lower positive returns experienced by target firm shareholders following the merger an-

nouncement. 

 

This evidence is interpreted as being consistent with obstacles such as cultural, legal, or 

transactional barriers, which are understood to hinder the successful completion of such 

transactions. Consequently, the probability of the merger's realization as announced is 

reduced, diminishing its expected value. 

 

Rose et al. (2017) argue that the means of payment is not expected to affect price reac-

tions, assuming that all securities are correctly priced and that market participants fully 

incorporate all relevant information. They continue that, in practice, this assumption is 

unlikely to hold due to various factors, as the bidder's choice of payment method ap-

pears to be influenced by prevailing market conditions. 

 



53 

Rose et al. (2017) analyse the announcement returns of 111 bidding and 73 target com-

panies. They found weak evidence of any value creation for the acquirer’s shareholders.  

The results for target companies were consistent and highly statistically significant. A 

cumulative abnormal return of approximately 20% was observed in every event window. 

In short, no consistent evidence of gains to the bidder’s shareholders was identified, 

while the target’s shareholders obtained large and meaningful returns from being ac-

quired. 

 

Since bidder shareholders do not benefit from an acquisition in the short run, Rose et al. 

(2017) suggest that bidder managers should consider this when contemplating financing 

the takeover with the company’s own shares. Additionally, in cases where a bidder CEO 

aims to acquire another listed company, it is considered important that the stock market 

is informed that the takeover decision is well-prepared, such as having a clear integration 

plan, to avoid disappointing bidder shareholders. 

 

While most previous research finds that, on average, cash offers yield higher returns for 

acquirers than mixed or pure stock offers, no evidence supporting this was found i