Credit ratings and the premiums paid in mergers and acquisitions

Jory, Surendranath, Ngo, Thanh N. and Wang, Daphne (2016) Credit ratings and the premiums paid in mergers and acquisitions. Journal of Empirical Finance, 39, part A, 93-104. (doi:10.1016/j.jempfin.2016.09.004).

Record type: Article

Abstract

We examine the contribution of credit ratings in the information set that bidders use to price targets. Using a sample that includes U.S. domestic deals completed between 1986 and 2012, we find that the presence of ratings significantly affects the M&A premiums paid in mergers and acquisitions (M&As). M&A premiums paid are lower in deals involving rated as opposed to nonrated firms. Assuming that the presence of ratings mitigates the problem of information asymmetry and allows bidders to pay a fair price for a target, then the post-M&A performance of bidders of rated targets would be superior. Indeed, we find that the presence of ratings and bidders’ post-M&A operating performance are positively related.

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