Mergers and risk
Abstract: This paper examines the impact of mergers on default risk, finding that, on average, a merger increases the default risk of the acquiring firm. This is surprising for two reasons: risk reduction is among the reasons commonly cited for mergers, and asset diversification should reduce default risk unless the newly-merged firm takes some action to increase risk. We associate the risk increase with mergers satisfying one of a trifecta of conditions related to agency problems: mergers financed with stock, acquirers with a high market- to-book ratio, and acquirers with poor stock price performance prior to a merger announcement. We also demonstrate higher levels of default risk are not accompanied by higher post- merger returns.
File(s): File format is application/pdf http://www.chicagofed.org/digital_assets/publications/working_papers/2006/wp2006_09.pdf
Provider: Federal Reserve Bank of Chicago
Part of Series: Working Paper Series
Publication Date: 2006