Corporate mergers and investment

There is concern that the recent wave of corporate mergers and acquisitions, largely financed by debt, raises interest rates and reduces investment. This paper demonstrates that the emphasis on the cost and availability of credit in discussions of this issue may be misplaced. As asset market model is presented which shows that an increase in debt-financed mergers could stimulate aggregate investment by raising the value of capital relative to replacement cost even though the loan rate rises and the supply of credit is unchanged.