On the importance of credit rating distance: evidence from mergers and acquisitions
Abstract
In this paper, we examine the impact of credit rating distance between acquirers and targets on mergers and acquisitions, using a sample of 409 U.S. domestic deals. We find that deals involving greater credit rating distance have significantly higher synergy returns, larger abnormal returns for both acquirers and targets around deal announcement, and stronger long-run performance. These findings underscore the potential for financial synergies when merging firms with differing capacities to access external debt markets. Through borrowing capability transfer, the pooled financing capacity of the combined entity can be more efficiently utilized, thereby mitigating both overinvestment associated with excess liquidity and underinvestment driven by financial constraints. We further document that greater credit rating distance increases the likelihood of cash payment, raises the probability of deal completion, and on average, reduces the time taken to complete the transaction. These results are robust after controlling for a range of firm and deal level characteristics and are consistent across alternative measurements and model specifications. Overall, this is the first comprehensive study using a formal event study framework to demonstrate the multi-dimensional impact of credit rating distance on M&A outcomes.