The disciplinary role of leverage: evidence from East Asian cross-border acquirers' returns

- Leverage has a disciplinary role for East Asian firms announcing foreign M&As.
- Leverage is associated with positive abnormal returns up to an optimal level.
- Excessive leverage exposes shareholders to agency costs.
- There is a negative relation between free cash flow and abnormal returns.
- The disciplinary effect is found for firms in both common and civil law countries.

We present evidence of an important disciplinary role for leverage in East Asian firms prior to making foreign acquisitions: as firms surpass an optimal leverage level, their excess leverage levels expose shareholders to agency costs which outweigh any benefits from the M&As. We find the disciplinary effect of leverage is present in both common and code law countries.