Credit spreads and merger pricing

Abstract

Previous studies (Axelson et al. in J Finance 68(6):2223–2267, 2013; Gorbenko and Malenko in J Finance 69(6):2513–2555, 2014) find that transaction prices and maximum-willingness-to-pay for targets are negatively correlated with credit market conditions. We extend the literature along two dimensions. First, we focus on takeover premiums (which account for market conditions), not transaction prices or maximum-willingness-to-pay. Second, we use predicted changes in credit spreads (which are less likely driven by confounding factors), not contemporaneous changes in credit spreads. Empirically, we find that predicted changes in the credit spread negatively impact takeover premiums, and that the correlation between predicted credit spreads and takeover premiums is not significantly different between private and public acquisitions.