Do Acquisition Announcements Have an Effect on the Acquiring Firm’s Credit Default Swap Spread?

Abstract

Credit Default Swaps are a recent financial innovation that allow bond owners to minimize their credit risk exposure by purchasing an insurance on the bonds in their portfolio. By paying a quarterly fee to the protection seller, normally a financial institution, the protection insures that incase the issuer of bonds is unable to pay its interest; they will not lose any of their investment.

The purpose of this study is to investigate what effect announcements of acquisitions have on the acquiring firm’s credit default swap spread (CDS spread). To investigate this, an event study was conducted on the firms belonging to the Europe Itraxx 125 list between December 2007 and November 2010. In total 93 unique acquisitions were recorded and tested included in the sample. The results of the study found that announcements did have a statistically significant effect on a corporation’s credit default swap spread. Further tests aimed at identifying what factors led to a higher or lower impact were not as successful. This is the first study researching the relationship between mergers and acquisitions with a firms’ credit default swap.