Mergers and risk

Craig H. Furfine and Richard Rosen

No WP-06-09, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: This paper examines the impact of mergers on default risk, finding that, on average, a merger increases the default risk of the acquiring firm. This is surprising for two reasons: risk reduction is among the reasons commonly cited for mergers, and asset diversification should reduce default risk unless the newly-merged firm takes some action to increase risk. We associate the risk increase with mergers satisfying one of a trifecta of conditions related to agency problems: mergers financed with stock, acquirers with a high market- to-book ratio, and acquirers with poor stock price performance prior to a merger announcement. We also demonstrate higher levels of default risk are not accompanied by higher post- merger returns.

Keywords: Bank mergers; Risk management (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-bec, nep-com and nep-rmg
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Citations: View citations in EconPapers (6)

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