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The Impact of Credit Rating on the Choice of Payment Method and Premium Paid in M&A Deals on Emerging Markets
Financial Markets and Financial Institutions
The rating agencies usually act as "information intermediaries", disclosing information about the creditworthiness of the company and assigning it a certain rating, thereby reducing the problem of asymmetry of information existing in the market. In this work, the author examines the role of the existence of credit ratings on the choice of payment method for the M & A transaction (cash or shares) and on the level of the premium paid during the transaction. According to the results, in emerging markets, the more likely the existence of a rating, the higher the chance that the transaction will be paid by equity. At the same time, neither the level of the buyer's company rating, nor the fact of it belonging to the investment class (BBB- and above) is significant in determining the payment method. Such kind of trend in emerging markets can be explained by the fact that most of the companies have a relatively low credit rating, which does not provide access to debt markets and doesn't allow to obtain the necessary financing on favorable terms. The main sources of funds in this case are either company's assets (cash or retained earnings) or loans from banks for which, obviously, the level of the credit rating is a relatively insignificant indicator. At the same time, it was found that unlike the developed capital markets, the existence of a credit rating does not influence the level of the premium paid at the emerging markets, which, on the one hand, indicates the current weak role of rating agencies in BRICS countries, on the other hand, shows a high asymmetry of information, the reduction of which requires serious economic and political changes.