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Wealth transfer, signaling and leverage in M&A

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  • Murray, Benjamin
  • Svec, Jiri
  • Wright, Danika

Abstract

Merger activity amplifies the conflict of interest between a bidder's different classes of security holders. This study examines how equity returns and credit default swap spreads are affected by acquisition-driven changes in firm leverage. We develop an improved proxy for predicted leverage changes which includes transaction financing and find it has a positive relationship with both equity returns and credit spreads. Using data for North American firms that made acquisition announcements between 2008 and 2014, we find that in leverage increasing mergers, bidding firm shareholders gain while bondholders lose. While these results are consistent with the wealth transfer literature we show that the gains to bidders' shareholders and losses to bidders' bondholders are caused by the change in leverage, not the form of payment or its signaling effect as is commonly documented.

Suggested Citation

  • Murray, Benjamin & Svec, Jiri & Wright, Danika, 2017. "Wealth transfer, signaling and leverage in M&A," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 203-212.
    • Handle: RePEc:eee:finana:v:52:y:2017:i:c:p:203-212
    DOI: 10.1016/j.irfa.2017.06.002
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    Cited by:

    1. Ismailescu, Iuliana & Col, Burcin, 2022. "Cross-border M&As and credit risk: Evidence from the CDS market," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 51-73.
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    3. Gao, Zaihan & Bao, Yue, 2022. "Do acquirers of mega mergers prefer to improve debt level? An investigation on mega deals and leverage change," Finance Research Letters, Elsevier, vol. 47(PB).

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    More about this item

    Keywords

    Mergers and acquisitions; Wealth transfer; Signaling; Leverage; Credit default swaps;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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