The Acquisition Motive of Newly Credit Rated Firms

Magnus Blomkvist, Karl Felixson, Eva Liljeblom, Hitesh Vyas and Anup Basnet
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Karl Felixson: Hanken School of Economics [Helsinki]
Hitesh Vyas: Audencia Business School
Anup Basnet: UNIS - University of Surrey

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Abstract: A large body of research documents an increased acquisition activity among credit rated firms. We examine whether firms seek an initial credit rating to conduct large scale acquisitions, and whether this acquisition activity is driven by empire building or value creation motives. First, we find that acquisitions are a credible motive for seeking a credit rating, initially rated firms are associated with 13.05pp greater acquisition likelihood and these transactions are more likely to be settled by cash. Second, to recoup the costs of becoming rated, firms conduct large-scale high-quality acquisitions associated with 1.52pp higher acquirer announcement returns, where the higher cumulative abnormal returns are concentrated among firms obtaining a speculative grade initial rating. Third, following the initial rating year, acquisition activity dampens to prerating levels. In sum our findings lend support to the notion that previously financial constrained firms enter the bond markets to complement bank financing when conducting large value enhancing acquisitions.

Keywords: Empire Building; Value Creation; Bond Ratings; Capital Supply; Credit Ratings; Capital Market Access; Mergers and Acquisitions (search for similar items in EconPapers)
Date: 2024-07
Note: View the original document on HAL open archive server: https://hal.science/hal-05671146v1
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Published in Journal of banking & finance = Journal of banking and finance, 2024, 164, pp.107218. ⟨10.1016/j.jbankfin.2024.107218⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05671146

DOI: 10.1016/j.jbankfin.2024.107218

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