Do firms have leverage targets? New evidence from mergers and acquisitions in China

We provide new and consistent evidence supporting the trade-off theory using China's mergers and acquisitions (M&A) deals between 2000 and 2015 as a sample. We show that acquirers do have leverage targets and they adjust their leverage ratios toward an optimal level at which the cost and benefit of the debt are equal. In examining the leverage adjustment speed during the post-acquisition period, we find that acquirers partially adjust their leverage ratios to the optimal levels; and the adjustment speed is affected by the adjustment cost proxied by the bankruptcy risk. Finally, we are able to successfully replicate the US evidence which is consistent with the trade-off theory as well using our improved methodology.