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Mergers and Acquisitions and Default Risk: Evidence from Western European Financial Sector

Mäkiaho, Teemu LU and Kiviniemi, Henri Rikhard LU (2019) NEKN02 20191
Department 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:
author
Mäkiaho, Teemu LU and Kiviniemi, Henri Rikhard LU
supervisor
organization
course
NEKN02 20191
year
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}},
}