Managerial Decision Making and Capital Structure

This article investigates leverage influence on project selection. First, the authors examine 428 mergers (1962-82) and then 389 acquisitions of all types (1982-86). Announcement-period acquirer returns are greater the higher the leverage of the acquirer. A third data set contains 173 acquisitions undertaken during 1978-90 for firms that underwent major increases in leverage, often forced by hostile takeover. Acquisition performance increases after restructuring. The evidence is invariant with respect to methodology--beta-adjusted abnormal returns, numeraire portfolio approach, and three-factor regression model residuals produce identical results. Overall, the data support the hypothesis that debt improves managerial decision-making.