A review of Cornaggia, J. and J. Y. Li, 2019, “The Value of Access to Finance: Evidence from M&A,” Journal of Financial Economics 131, 232-250.
I. Research question and its importance
Following the novel branch of “corporate tax inversions” and “reverse mergers” in M&A literature, the authors examine two hypotheses: aggressive acquirer hypothesis and attractive target hypothesis. Namely, they investigate how financial efficiency (i.e., access to bank finance) is positively related to the likelihood of being acquired, condition on acquirer’s financial efficiency. This research question is important for three reasons. First, according to the authors, there were only five papers prior to this publication that examine this proposition. Second, while financial efficiency was covered by other works, the focus was on acquirer instead of target (e.g., aggressive acquirer hypothesis). This work aims to fill the void. Finally, since they exploit deregulation as a natural experiment, they separate (p. 234) “(1) deregulated states’ improved access to bank finance, or (2) changes in growth opportunities in deregulated states that coincide with these states’ banking deregulations but are not fully absorbed by our controls” therefore provide meaningful supports to the hypotheses.
II. Method and findings
As mentioned, they exploit the staggered deregulation of US interstate bank law and observe the cross-state M&A deals between 1981 and 1997. Specifically, they construct control pair-state for each observation and include fixed effects in the model to provide credible comparison. For robustness, they also test for reverse causality as well as other alternative explanations. Ultimately, their finding provide support to the attractive target hypothesis, where targets with more access to bank finance are, on average, more likely to be acquired. This relation is stronger for acquirers with “greater friction in accessing bank loan (p.232).”
III. Limitation and future research
However, the model specification of this paper needs refinement. Namely, moderator (MO) was missing in this paper. Particularly, the authors shall have showed Table 7 as a preliminary result that shows difference between acquirer groups, then provided another table with moderator estimations. Because the coefficient of this interaction term provides better support to the claim that magnitude is higher condition on acquirers’ characteristics. Hypothetically we can expect these scenarios whose interpretations might support or refute the current conclusion.
Scenario 1: IV and MO are both significant, current conclusion holds.
Scenario 2: Significant IV with insignificant MO, indicating there’s no difference condition on acquirers’ access to bank loan.
Scenario 3: Significant MO with insignificant IV, pertaining the effect is only significant while the acquirer’s less access to bank finance. In brief, this moderator leads to different interpretations of findings and might change conclusion of this paper. Therefore, the authors shall have included it in a revision.