Cross-Border M&As and Credit Risk: Evidence from the CDS Market

Abstract

This paper examines the impact of cross-border acquisition announcements on the U.S. bidders’ credit risk. On average, we find a significant increase in bidders’ rating-adjusted credit default swap (CDS) spreads around an acquisition announcement in an emerging market (EM), but no marked change if the target firm is from a developed market. The EM result is driven primarily by majority but not full control transactions, and by risky acquirers. We also find evidence of wealth transfer from acquirers’ bondholders to shareholders in EM acquisitions, which is stronger when transactions result in majority but not full control of the target or when acquirers are rated sub-investment grade. We attribute the rise in U.S. bidders’ credit risk around announcements of majority but not full control EM acquisitions to the weaker legal environment and creditor protection in the target nation relative to those in the U.S.

Keywords: Cross-Border M&As; CDS Spreads; Emerging Markets; Spillover Effects; Wealth Transfer

JEL Classification: F30, G12, G14, G15, G28, G32, G34