Foreign Acquisition and Credit Risk: Evidence from the U.S. CDS Market

Abstract

This paper empirically analyzes the effect of foreign acquisition on the U.S. targets' credit risk. The involvement of foreign investors triggers a major shift in target firms' risk. The change in firm-level risk relates to the ability of foreign investors to change the investment policy of the acquired firms towards risky projects. Indeed, foreign acquirers benefit from international diversification and perform highly effective monitoring. Using a difference-in-differences approach, my results confirm this hypothesis as the CDS premium and the stock return volatility significantly increase after a foreign acquisition. Overall, the findings hold true in a triple differences approach and in a propensity score matching analysis to control for self-selection issues.