Are Credit Rating Disagreements Priced in the M&A Market?
Journal of International Financial Markets, Institutions and Money, Vol. 72, 101335, 2021
41 Pages Posted: 22 Mar 2021 Last revised: 26 Jul 2022
Date Written: March 20, 2021
This paper examines the effect of credit rating disagreements on merger and acquisition (M&A) decisions. We show that acquirers with split ratings prefer to use stock to finance their acquisitions. More importantly, we find that acquirers with split ratings experience lower announcement returns. Further analysis shows that overpayment by acquirers with split ratings is concentrated in acquirers with entrenched managers. Our results are robust to alternative identification strategies. Overall, our evidence indicates that credit rating disagreements are heavily priced in the M&A market.
Keywords: Bond ratings, Method of payment, Merger and acquisitions
JEL Classification: G24, G33, J33
Suggested Citation: Suggested Citation