Financing Constraints And Diversification M&A

The selected topic background of this paper from the recent M&A boom and SME financing difficult problem The article researches diversification M&A from the perspective of financing constraints on the basis of related theories and literature review. Previous literatures which research the relationship between M&A and financing constraints, tend to do empirical research and lack of deep research on the theory. Meanwhile, these literatures are not considering the complexity of the M&A motivation. Based on internal capital market theory, the article has made the analysis and summary for the theoretical mechanism of why M&A can relax the financing constraints of the enterprise. According to theoretical analysis, the paper argues that M&A has more ability to easing the enterprise financing constraints. And, in studying whether financing constraints promotes the diversification M&A, this article consider the influence of other factors.According to the internal capital market in the allocation of funds, the role of the money collected, spread risk, the efficiency variances of the departments in the enterprise formed by diversification M&A is more different and the cash flow of the diversification enterprise is more stable, because of departments in the diversification enterprise involving different business areas. So compared with the specialization mergers, the internal capital markets formed by diversification mergers is more efficient. Therefore diversification mergers can more relax the enterprise financing constraints. When research easing the financing constraints maybe is diversification mergers motivation, this article combines FCFH and overconfidence theory both of them can explain the reality well, making the research more comprehensive.Through investment-cash flow sensitivity model proposed by FHP(1986), the article compare the variations of coefficient between the variable dummy variables (whether acquisitions as a dummy variable) and operating cash flows in different samples groups divided by diversified mergers or not, to illustrate the financing constraint impact of M&A events. The study showed that:M&A can relax the financing constraints of listed companies, moreover diversification mergers can relax more. Therefore, the article indirectly support the internal capital market of diversification enterprise is more efficient than professional enterprise.In the process of empirical research on the study of the diversification M&A motivation, this paper investigate diversification M&A motivation by using the logistic regression equation with the financing constraints, operating cash flow, performance as the explained variable. The results show that financing constraints is not motivation of diversified acquisitions. But overconfidence theory can explain the reason of diversified mergers and acquisitions. The private sector tends to be more diversified acquisitions because of CEO’s overconfidence. In the study of the performance of diversified, the article verifies the diversified mergers and acquisitions adverse the company’s long-term performance, in line with diversified M&A motivation empirical results.