Mergers and risk
AbstractThis 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.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-06-09.
Date of creation: 2006
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-16 (All new papers)
- NEP-BEC-2006-12-16 (Business Economics)
- NEP-COM-2006-12-16 (Industrial Competition)
- NEP-RMG-2006-12-16 (Risk Management)
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