Credit Ratings Impact on Acquisition Premium in M&A Deals

This study examines the impact of credit ratings on premiums paid in M&A deals between public companies in the European market between 2002 and 2018. Using regression analysis this study investigates not only how the presence of credit ratings affects M&A premiums, but also what effect the level of credit ratings has on them. Assuming that the presence of ratings mitigates the problem of information asymmetry and reduces uncertainty about target firm value, we then discovered that M&A premiums are lower in deals involving rated targets compared to nonrated ones. Also, as credit rating reflects the financial health of the company, we found evidence that targets holding higher rating levels are more likely to get a higher premium. However, looking at bidders’ credit ratings, we discovered that buyers’ credit ratings do not have a significant effect on M&A premiums due to the existence of opposing forces, described in this paper, and their effect on M&A premiums. Therefore, in conducting this study we reduce uncertainty in the financial decision-making process by providing guidelines for business sector.