Easing the squeeze: How do acquisitions relieve target firms’ financial constraints?

Using private firm financial data, we investigate how acquisitions alleviate financial constraints in private firms. We find that targets’ internal financing improves after acquisitions because they can retain higher proportions of earnings and borrow interest-free capital from their parent companies. Targets also receive better external financing as they obtain more debt financing with lower interest rates, borrow more trade credit from suppliers, and collect receivables from customers more quickly. Our findings suggest that internal and external financing improvements contribute to reducing targets’ financial constraints. • How acquisitions alleviate financial constraints in private targets post-acquisition? • Targets retain higher proportions of earnings and borrow interest-free capital from their parents. • Targets obtain more debt financing with lower interest. • Targets receive more trade credit from suppliers and collect receivables from customers more quickly. • Improvements in both internal and external financing help alleviate target firms’ financial constraints.