Credit Ratings and Acquisitions
55 Pages Posted: 3 Jul 2015 Last revised: 26 Jun 2017
Date Written: June 25, 2017
There is a curvilinear relation between acquisitions and credit ratings. Non-investment grade firms make more acquisitions as their ratings improve, consistent with the relaxation of financial constraints. However, this pattern reverses for investment grade firms, supporting the view that such firms want to preserve their rating and are concerned about acquisition-related downgrades. Abnormal returns first decrease and then increase as ratings improve. Acquisitions have a negative impact on future ratings for highly-rated firms, but a positive impact for firms with low ratings. These results indicate that the level of a firm’s credit rating has a significant impact on the acquisition process.
Keywords: credit ratings, acquisitions, financial constraints, takeover aversion
JEL Classification: G30, G34
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