Credit Market Driven Acquisitions

Abstract

Using a comprehensive sample of takeovers over 1983-2016, we show that credit market conditions drive takeover activity. When credit spreads are low in quarter t, junk bonds are disproportionately issued and aggregate credit quality deteriorates; debt-financed, all-cash takeovers increase from quarter t+2, peak at quarter t+5, and subside as credit spreads widen. At the firm level, buoyant credit market conditions correlate with more debt-financed takeovers, particularly for overconfident CEOs, and also with higher announcement-day returns and operating performance, except for overconfident CEOs. Our results are consistent with buoyant credit market conditions ameliorating under-investment, but only for acquirers with non-overconfident CEOs.

Keywords: takeovers, mergers and acquisitions, credit quality, merger waves.

JEL Classification: G34, G32.