Mergers and Acquisitions and Default Risk: Evidence from Western European Financial Sector
(2019) NEKN02 20191Department of Economics
- Abstract
- The purpose of this paper is to examine the impact of mergers and acquisitions on the default
risk of acquiring companies. The sample consists of 276 transactions carried out between 2010
and 2018 by acquirers from Western European financial sector. We estimate the acquirer’s
default risk using Merton Distance-to-Default model and further regress a set of independent
variables with the changes in default risk in order to find out what contributes to these changes.
On average, we find these transactions to be rather risk-neutral. Breaking down the whole
sample to smaller sub-samples reveals that acquirers who have high default risk before the deal
experience significant decreases in their default risk. Results from the regression... (More) - The purpose of this paper is to examine the impact of mergers and acquisitions on the default
risk of acquiring companies. The sample consists of 276 transactions carried out between 2010
and 2018 by acquirers from Western European financial sector. We estimate the acquirer’s
default risk using Merton Distance-to-Default model and further regress a set of independent
variables with the changes in default risk in order to find out what contributes to these changes.
On average, we find these transactions to be rather risk-neutral. Breaking down the whole
sample to smaller sub-samples reveals that acquirers who have high default risk before the deal
experience significant decreases in their default risk. Results from the regression analysis
indicate the Merton model being more sensitive to, newly introduced variable, change in
idiosyncratic risk than to change in leverage. We found no significant results indicating crossindustry
diversification effects, whereas cross-border deals were decreasing the default risk.
Outside the main discoveries of our study, our findings indicate prior idiosyncratic risk, prior
leverage, and relative transaction size to be increasing the default risk. Another risk-reducing
factor beside cross-border characteristic was cash payment. The found evidence casts yet
another doubt upon M&A deals from acquirers' standpoint, questioning their role as reasonable
investments. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/8987038
- author
- Mäkiaho, Teemu LU and Kiviniemi, Henri Rikhard LU
- supervisor
- organization
- course
- NEKN02 20191
- year
- 2019
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- M&A, Default Risk, Merton Model, Probability of Default, Distance-to-Default, Financial Sector
- language
- English
- id
- 8987038
- date added to LUP
- 2019-08-08 10:28:59
- date last changed
- 2019-08-08 10:28:59
@misc{8987038, abstract = {{The purpose of this paper is to examine the impact of mergers and acquisitions on the default risk of acquiring companies. The sample consists of 276 transactions carried out between 2010 and 2018 by acquirers from Western European financial sector. We estimate the acquirer’s default risk using Merton Distance-to-Default model and further regress a set of independent variables with the changes in default risk in order to find out what contributes to these changes. On average, we find these transactions to be rather risk-neutral. Breaking down the whole sample to smaller sub-samples reveals that acquirers who have high default risk before the deal experience significant decreases in their default risk. Results from the regression analysis indicate the Merton model being more sensitive to, newly introduced variable, change in idiosyncratic risk than to change in leverage. We found no significant results indicating crossindustry diversification effects, whereas cross-border deals were decreasing the default risk. Outside the main discoveries of our study, our findings indicate prior idiosyncratic risk, prior leverage, and relative transaction size to be increasing the default risk. Another risk-reducing factor beside cross-border characteristic was cash payment. The found evidence casts yet another doubt upon M&A deals from acquirers' standpoint, questioning their role as reasonable investments.}}, author = {{Mäkiaho, Teemu and Kiviniemi, Henri Rikhard}}, language = {{eng}}, note = {{Student Paper}}, title = {{Mergers and Acquisitions and Default Risk: Evidence from Western European Financial Sector}}, year = {{2019}}, }