Debtholder Wealth Effects in Mergers and Acquisitions: Evidence from the CDS Market

Abstract

This paper examines changes in acquirer and target companies’ Credit Default Swap (CDS) spreads as a proxy for default risk around official mergers and acquisitions (M&A) announce-ments. Related literature extensively documents wealth effects triggered by M&A from the shareholders’ perspective, but there is only a slight evidence on the wealth effects experienced by the transaction firms’ debtholders. Therefore, this study adds to the literature by exploring the impact of M&A announcements on CDS spreads empirically. A negative correlation between M&A and the development of the value of debt securities is increasingly being addressed as a central theme from the acquirer’s perspective. In contrast, the literature assumes that the target’s debtholders earn positive wealth effects from acquisition. Hence, we detect acquiring and target firms’ abnormal changes in CDS spreads between 2004 and 2016 as a basis for regression analyses. In this regard, we take deal characteristics as well as other determinants that could have influenced respective company’s credit risk into account. Our evidence suggests that M&A, on average, increase the acquiring firms’ default risk, but tend to improve the target firms’ risk position.