Mergers Increase Default Risk
33 Pages Posted: 17 Mar 2006 Last revised: 14 Mar 2012
Date Written: January 26, 2009
We examine the impact of mergers on default risk. Despite the potential for asset diversification, we find that, on average, a merger increases the default risk of the acquiring firm. This result cannot solely be explained by the tendency for generally safe acquirers to purchase riskier targets or by the tendency of acquiring firms to increase leverage post-merger. Our evidence suggests that manager-related issues may play an important role. In particular, we find larger merger-related increases in risk at firms where CEOs have large option-based compensation, where recent stock performance is poor, and where idiosyncratic equity volatility is high. These results suggest that the increased default risk may arise from aggressive managerial actions affecting risk enough to outweigh the strong risk-reducing asset diversification expected from a typical merger.
Keywords: mergers, default risk, EDF
JEL Classification: G34, G33
Suggested Citation: Suggested Citation