Is rated debt arm's length? : evidence from mergers and acquisitions
- In this paper we challenge the view that corporate bonds are always arm’s length debt. We analyze the effect of bond ratings on the stock price return to acquirers in M&A transactions, which tend to have significant effects on creditor wealth. We find acquirers abnormal returns to be higher if they are unrated, controlling for a wide variety of other effects identified in the literature. Tracing the difference in returns to distinct managerial decisions, we find that, everything else constant, rated firms increase their leverage in takeover transactions by less than their unrated counterparts. Consistent with a significant role for rating agencies, we find monitoring effects to be strongest when acquirer bonds are rated at the borderline between investment grade and junk. Finally, we are able to empirically exclude a large number of alternative explanations for the empirical regularities that we uncover. JEL Classification: G21, G24, G32, G34 Keywords: Acquisitions, Credit Ratings, Mergers and Acquisitions, Arm’s Length Debt, Abnormal Returns
Author: | Reint GroppGND, Christian HirschGND, Jan Pieter KrahnenORCiDGND |
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URN: | urn:nbn:de:hebis:30-101925 |
Parent Title (German): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2011,10 |
Series (Serial Number): | CFS working paper series (2011, 10) |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2011 |
Year of first Publication: | 2011 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2011/04/29 |
Tag: | Abnormal Returns; Acquisitions; Arm’s Length Debt; Credit Ratings; Mergers and Acquisitions |
Issue: | March 2011 |
Page Number: | 46 |
HeBIS-PPN: | 245940499 |
Institutes: | Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |