The Burden of the National Debt: Evidence from Mergers and Acquisitions

We examine the impact of changes in national debt on the mergers and acquisitions (M&As) activity. Although increases in government debt reduces the acquisition likelihood, we find no evidence for the traditional interest rate mechanism. Instead, we document that upsurges in national debt depress M&A activity through increases in fiscal policy related uncertainty (taxes, discretionary spending, entitlement programs etc.). During periods of increasing national debt, acquirers decrease stock-based financing relative to cash-based financing and reduce the acquisition of targets with a higher degree of investment irreversibility. In such periods, announced deals are associated with lower premiums and lower synergistic gains.