Targeting capital structure: The relationship between risky debt and the firm's likelihood of being acquired

In a takeover, wealth transfers from bidder and target equityholders to target debtholders can occur if target debt is coinsured by either the bidder's assets or by the synergy itself. Such wealth transfers reduce bidder and target shareholder gains and could poison the acquisition. With a sample from 1979-90, I find that, as the coinsurance potential of a firm's debt-measured as the amount of relatively risky debt outstanding-increases, its likelihood of being acquired decreases. In particular, I find this coinsurance deterrent to be strongest during the 1985-90 period and strongest for firms with public debt outstanding.