Hostname: page-component-848d4c4894-cjp7w Total loading time: 0 Render date: 2024-07-05T16:21:15.196Z Has data issue: false hasContentIssue false
  • English
  • Français

Foreign Acquisition and Credit Risk: Evidence from the U.S. CDS Market

Published online by Cambridge University Press:  17 January 2022

Umit Yilmaz Open the ORCID record for Umit Yilmaz [Opens in a new window]
Umit Yilmaz*
Affiliation:
Ozyegin University Faculty of Business
*
umit.yilmaz@ozyegin.edu.tr (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

This article empirically analyzes the effect of foreign block acquisitions on U.S. target firms’ credit risk as measured by their credit default swap (CDS) spreads. Foreign block purchases lead to a greater increase in the target firms’ CDS premia post-acquisition compared to domestic block purchases. This effect is stronger when foreign owners are geographically and culturally more distant, and when they obtain majority control. The findings are consistent with an asymmetric information hypothesis, in which foreign owners are less effective monitors due to information barriers.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 4 , June 2023 , pp. 1734 - 1767
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I am indebted to my advisor, Alberto Plazzi, for his guidance. I thank an anonymous referee, Isil Erel, Rüdiger Fahlenbrach, Francesco Franzoni, Laurent Frésard, Levent Güntay, Gerard Hoberg, Oğuzhan Karakaş, Christoph Schneider, Jovan Stojkovic, René Stulz, Fabio Trojani, and Guner Velioglu for insightful discussions and comments. I would like to acknowledge comments from seminar participants at the Annual Swiss Doctoral Workshop, SFI Finance Workshop, 2017 European Retail Investment Conference (ERIC) Doctoral Consortium, 2017 Finance Forum, 2017 Conference on Credit Analysis and Risk Management, 2017 Annual Meeting of the German Finance Association, 2018 Annual Conference of the Swiss Society for Financial Market Research, and The Ohio State University. The article was partly completed while I was visiting the Fisher College of Business at The Ohio State University, whose hospitality is gratefully acknowledged. All errors are my own.

References

Acemoglu, D., and Zilibotti, F.. “Was Prometheus Unbound by Chance? Risk, Diversification, and Growth.” Journal of Political Economy, 105 (1997), 709–751.CrossRefGoogle Scholar
Aggarwal, R.; Erel, I.; Ferreira, M.; and Matos, P.. “Does Governance Travel Around the World? Evidence from Institutional Investors.” Journal of Financial Economics, 100 (2011), 154–181.CrossRefGoogle Scholar
Aitken, B. J., and Harrison, A. E.. “Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela.” American Economic Review, 89 (1999)605–618.CrossRefGoogle Scholar
Alexandridis, G.; Fuller, K. P.; Terhaar, L.; and Travlos, N. G.. “Deal Size, Acquisition Premia and Shareholder Gains.” Journal of Corporate Finance, 20 (2013), 1–13.CrossRefGoogle Scholar
Altman, E. I. “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589–609.CrossRefGoogle Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Andrade, G., Mitchell, M. L., and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103–120.CrossRefGoogle Scholar
Angrist, J. D., and Pischke, J.-S.. Mostly Harmless Econometrics: An Empiricist’s Companion. Princeton University Press (2009).CrossRefGoogle Scholar
Arnold, J. M., and Javorcik, B. S.. “Gifted Kids or Pushy Parents? Foreign Direct Investment and Plant Productivity in Indonesia.” Journal of International Economics, 79 (2009), 42–53.CrossRefGoogle Scholar
Augustin, P., and Izhakian, Y.. “Ambiguity, Volatility, and Credit Risk.” Review of Financial Studies, 33 (2020), 1618–1672.CrossRefGoogle Scholar
Augustin, P.; Subrahmanyam, M. G.; Tang, D. Y.; and Wang, S. Q.. “Credit Default Swaps – A Survey.” Foundations and Trends in Finance, 9 (2014), 1–196.CrossRefGoogle Scholar
Bai, J., and Wu, L.. “Anchoring Credit Default Swap Spreads to Firm Fundamentals.” Journal of Financial and Quantitative Analysis, 51 (2016), 1521–1543.CrossRefGoogle Scholar
Baik, B.; Kang, J.-K.; and Kim, J.-M.. “Local Institutional Investors, Information Asymmetries, and Equity Returns.” Journal of Financial Economics, 97 (2010), 81–106.CrossRefGoogle Scholar
Bartram, S. M.; Conrad, J. S.; Lee, J.; and Subrahmanyam, M. G.. “Credit Default Swaps Around the World: Investment and Financing Effects.” WBS Finance Group Research Paper No. 248, available at https://ssrn.com/abstract=3157187 (2019).CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; and Lumsdaine, R. L.. “Dating the Integration of World Equity Markets.” Journal of Financial Economics, 65 (2002), 203–247.CrossRefGoogle Scholar
Ben-David, I.; Franzoni, F.; Moussawi, R.; and Sedunov, J.. The Granular Nature of Large Institutional Investors. Management Science, 67, 11 (2021), 6629–6659.CrossRefGoogle Scholar
Berger, P. G., and Ofek, E.. “Diversification’s Effect on Firm Value.” Journal of Financial Economics, 37 (1995), 39–65.CrossRefGoogle Scholar
Bessembinder, H.; Kahle, K. M.; Maxwell, W. F.; and Xu, D.. “Measuring Abnormal Bond Performance.” Review of Financial Studies, 22 (2009), 4219–4258.CrossRefGoogle Scholar
Bharath, S. T., and Shumway, T.. “Forecasting Default with the Merton Distance to Default Model.” Review of Financial Studies, 21 (2008), 1339–1369.CrossRefGoogle Scholar
Billett, M. T.; Jiang, Z.; and Lie, E.. “The Effect of Change-in-Control Covenants on Takeovers: Evidence from Leveraged Buyouts.” Journal of Corporate Finance, 16 (2010), 1–15.CrossRefGoogle Scholar
Billett, M. T.; King, T.-H. D.; and Mauer, D. C.. “Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s.” Journal of Finance, 59 (2004), 107–135.CrossRefGoogle Scholar
Blanco, R.; Brennan, S.; and Marsh, I. W.. “An Empirical Analysis of the Dynamic Relation Between Investment-Grade Bonds and Credit Default Swaps.” Journal of Finance, 60 (2005), 2255–2281.CrossRefGoogle Scholar
Bolton, P., and Oehmke, M.. “Credit Default Swaps and the Empty Creditor Problem.” Review of Financial Studies, 24 (2011), 2617–2655.CrossRefGoogle Scholar
Brennan, M. J., and Cao, H. H.. “International Portfolio Investment Flows.” Journal of Finance, 52 (1997), 1851–1880.CrossRefGoogle Scholar
Bris, A., and Cabolis, C.. “The Value of Investor Protection: Firm Evidence from Crossborder Mergers.” Review of Financial Studies, 21 (2008), 605–648.CrossRefGoogle Scholar
Buraschi, A.; Trojani, F.; and Vedolin, A.. “Economic Uncertainty, Disagreement, and Credit Markets.” Management Science, 60 (2013), 1281–1296.CrossRefGoogle Scholar
Busso, M.; DiNardo, J.; and McCrary, J.. “Finite Sample Properties of Semiparametric Estimators of Average Treatment Effects.” Working Paper, University of Michigan (2008).Google Scholar
Campbell, J. Y., and Taksler, G. B.. “Equity Volatility and Corporate Bond Yields.” Journal of Finance, 58 (2003), 2321–2350.CrossRefGoogle Scholar
Chan, K.; Menkveld, A. J.; and Yang, Z.. “Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount.” Journal of Finance, 63 (2008), 159–196.CrossRefGoogle Scholar
Chang, X.; Chen, Y.; Wang, S. Q.; Zhang, K.; and Zhang, W.. “Credit Default Swaps and Corporate Innovation.” Journal of Financial Economics, 134 (2019), 474–500.CrossRefGoogle Scholar
Chari, A.; Chen, W.; and Dominguez, K. M.. “Foreign Ownership and Firm Performance: Emerging Market Acquisitions in the United States.” IMF Economic Review, 60 (2012), 1–42.CrossRefGoogle Scholar
Chari, A.; Ouimet, P. P.; and Tesar, L. L.. “The Value of Control in Emerging Markets.” Review of Financial Studies, 23 (2010), 1741–1770.CrossRefGoogle Scholar
Chen, J.; Leung, W. S.; Song, W.; and Avino, D.. “Does CDS Trading Affect Risk-Taking Incentives in Managerial Compensation?” Journal of Banking & Finance (2019), 105485. https://doi.org/10.1016/j.jbankfin.2019.01.004.Google Scholar
Chen, W. “The Effect of Investor Origin on Firm Performance: Domestic and Foreign Direct Investment in the United States.” Journal of International Economics, 83 (2011), 219–228.CrossRefGoogle Scholar
Colonnello, S.; Efing, M.; and Zucchi, F.. “Shareholder Bargaining Power and the Emergence of Empty Creditors.” Journal of Financial Economics, 134 (2019), 297–317.CrossRefGoogle Scholar
Coval, J. D., and Moskowitz, T. J.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.CrossRefGoogle Scholar
Cremers, K. M.; Nair, V. B.; and John, K.. “Takeovers and the Cross-Section of Returns.” Review of Financial Studies, 22 (2009), 1409–1445.CrossRefGoogle Scholar
Cronqvist, H., and Fahlenbrach, R.. “Large Shareholders and Corporate Policies.” Review of Financial Studies, 22 (2009), 3941–3976.CrossRefGoogle Scholar
Dewenter, K. L. “Does the Market React Differently to Domestic and Foreign Takeover Announcements? Evidence from the U.S. Chemical and Retail Industries.” Journal of Financial Economics, 37 (1995), 421–441.CrossRefGoogle Scholar
Dierkens, N. “Information Asymmetry and Equity Issues.” Journal of Financial and Quantitative Analysis, 26 (1991), 181–199.CrossRefGoogle Scholar
Djankov, S.; Hart, O.; McLiesh, C.; and Shleifer, A.. “Debt Enforcement Around the World.” Journal of Political Economy, 116 (2008), 1105–1149.CrossRefGoogle Scholar
Doms, M. E., and Jensen, J. B.. “Comparing Wages, Skills, and Productivity Between Domestically and Foreign-Owned Manufacturing Establishments in the United States.” In Geography and Ownership as Bases for Economic Accounting. University of Chicago Press (1998), 235–258.Google Scholar
Dong, M.; Hirshleifer, D.; Richardson, S.; and Teoh, S. H.. “Does Investor Misevaluation Drive the Takeover Market?” Journal of Finance, 61 (2006), 725–762.CrossRefGoogle Scholar
Dvořák, T. “Do Domestic Investors Have an Information Advantage? Evidence from Indonesia.” Journal of Finance, 60 (2005), 817–839.CrossRefGoogle Scholar
Eckbo, B. E.; Giammarino, R. M.; and Heinkel, R. L.. “Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests.” Review of Financial Studies, 3 (1990), 651–675.CrossRefGoogle Scholar
Eckbo, B. E., and Langohr, H.. “Information Disclosure, Method of Payment, and Takeover Premiums: Public and Private Tender Offers in France.” Journal of Financial Economics, 24 (1989), 363–403.CrossRefGoogle Scholar
Eisenthal-Berkovitz, Y.; Feldhütter, P.; and Vig, V.. “Leveraged Buyouts and Bond Credit Spreads.” Journal of Financial Economics, 135 (2020), 577–601.CrossRefGoogle Scholar
Erel, I.; Liao, R. C.; and Weisbach, M. S.. “Determinants of Cross-Border Mergers and Acquisitions.” Journal of Finance, 67 (2012), 1045–1082.CrossRefGoogle Scholar
Faccio, M.; Marchica, M.-T.; and Mura, R.. “Large Shareholder Diversification and Corporate Risk-Taking.” Review of Financial Studies, 24 (2011), 3601–3641.CrossRefGoogle Scholar
Ferreira, M. A.; Massa, M.; and Matos, P.. “Shareholders at the Gate? Institutional Investors and Cross-Border Mergers and Acquisitions.” Review of Financial Studies, 23 (2010), 601–644.CrossRefGoogle Scholar
Ferreira, M. A., and Matos, P.. “The Colors of Investors Money: The Role of Institutional Investors Around the World.” Journal of Financial Economics, 88 (2008), 499–533.CrossRefGoogle Scholar
Francis, B. B.; Hasan, I.; John, K.; and Waisman, M.. “The Effect of State Antitakeover Laws on the Firm’s Bondholders.” Journal of Financial Economics, 96 (2010), 127–154.CrossRefGoogle Scholar
Frésard, L.; Hege, U.; and Phillips, G.. “Extending Industry Specialization Through Cross-Border Acquisitions.” Review of Financial Studies, 30 (2017), 1539–1582.CrossRefGoogle Scholar
Furfine, C. H., and Rosen, R. J.. “Mergers Increase Default Risk.” Journal of Corporate Finance, 17 (2011), 832–849.CrossRefGoogle Scholar
Galai, D., and Masulis, R. W.. “The Option Pricing Model and the Risk Factor of Stock.” Journal of Financial Economics, 3 (1976), 53–81.CrossRefGoogle Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–156.CrossRefGoogle Scholar
Grossman, S. J., and Hart, O. D.. “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration.” Journal of Political Economy, 94 (1986), 691–719.CrossRefGoogle Scholar
Güntay, L., and Hackbarth, D.. “Corporate Bond Credit Spreads and Forecast Dispersion.” Journal of Banking & Finance, 34 (2010), 2328–2345.CrossRefGoogle Scholar
Harris, R. S., and Ravenscraft, D.. “The Role of Acquisitions in Foreign Direct Investment: Evidence from the US Stock Market.” Journal of Finance, 46 (1991), 825–844.CrossRefGoogle Scholar
Hau, H. “Location Matters: An Examination of Trading Profits.” Journal of Finance, 56 (2001), 1959–1983.CrossRefGoogle Scholar
Helpman, E.; Melitz, M. J.; and Yeaple, S. R.. “Export Versus FDI with Heterogeneous Firms.” American Economic Review, 94 (2004), 300–316.CrossRefGoogle Scholar
Hirano, K.; Imbens, G. W.; and Ridder, G.. “Efficient Estimation of Average Treatment Effects Using the Estimated Propensity Score.” Econometrica, 71 (2003), 1161–1189.CrossRefGoogle Scholar
Hofstede, G. Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations. Sage Publications (2001).Google Scholar
Ivković, Z., and Weisbenner, S.. “Local Does as Local Is: Information Content of the Geography of Individual Investors’ Common Stock Investments.” Journal of Finance, 60 (2005), 267–306.CrossRefGoogle Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Jorion, P., and Zhang, G.. “Good and Bad Credit Contagion: Evidence from Credit Default Swaps.” Journal of Financial Economics, 84 (2007), 860–883.CrossRefGoogle Scholar
Jostova, G.; Nikolova, S.; Philipov, A.; and Stahel, C. W.. “Momentum in Corporate Bond Returns.” Review of Financial Studies, 26 (2013), 1649–1693.CrossRefGoogle Scholar
Kang, J.-K., and Kim, J.-M.. “The Geography of Block Acquisitions.” Journal of Finance, 63 (2008), 2817–2858.CrossRefGoogle Scholar
Kang, J.-K., and Kim, J.-M.. “Do Foreign Investors Exhibit a Corporate Governance Disadvantage? An Information Asymmetry Perspective.” Journal of International Business Studies, 41 (2010), 1415–1438.CrossRefGoogle Scholar
Kang, J.-K., and Stulz, R. M.. “Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan.” Journal of Financial Economics, 46 (1997), 3–28.CrossRefGoogle Scholar
Kim, Y. S., and Mathur, I.. “The Impact of Geographic Diversification on Firm Performance.” International Review of Financial Analysis, 17 (2008), 747–766.CrossRefGoogle Scholar
La Porta, R.; Lopez-de Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Agency Problems and Dividend Policies Around the World.” Journal of Finance, 55 (2000), 1–33.CrossRefGoogle Scholar
Laeven, L., and Levine, R.. “Is There a Diversification Discount in Financial Conglomerates?” Journal of Financial Economics, 85 (2007), 331–367.CrossRefGoogle Scholar
Lee, J.; Naranjo, A.; and Velioglu, G.. “When Do CDS Spreads Lead? Rating Events, Private Entities, and Firm-Specific Information Flows.” Journal of Financial Economics, 130 (2018), 556–578.CrossRefGoogle Scholar
Li, F.; Morgan, K. L.; and Zaslavsky, A. M.. “Balancing Covariates via Propensity Score Weighting.” Journal of the American Statistical Association, 113 (2018), 390–400.CrossRefGoogle Scholar
Longstaff, F. A.; Mithal, S.; and Neis, E.. “Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market.” Journal of Finance, 60 (2005), 2213–2253.CrossRefGoogle Scholar
Maquieira, C. P.; Megginson, W. L.; and Nail, L.. “Wealth Creation Versus Wealth Redistributions in Pure Stock-for-Stock Mergers.” Journal of Financial Economics, 48 (1998), 3–33.CrossRefGoogle Scholar
Merton, R. C. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance, 29 (1974), 449–470.Google Scholar
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “Firm Size and the Gains from Acquisitions.” Journal of Financial Economics, 73 (2004), 201–228.CrossRefGoogle Scholar
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “How Do Diversity of Opinion and Information Asymmetry Affect Acquirer Returns?” Review of Financial Studies, 20 (2007), 2047–2078.CrossRefGoogle Scholar
Morrison, A. D. “Credit Derivatives, Disintermediation, and Investment Decisions.” Journal of Business, 78 (2005), 621–648.CrossRefGoogle Scholar
Obstfeld, M. “Risk-Taking, Global Diversification, and Growth.” American Economic Review, 84 (1994), 1310–1329.Google Scholar
OECD. “Toward a Level Playing Field.” Available at https://www.oecd.org/ctp/exchange-of-tax-information/taxco-operationtowardsalevelplayingfield-2008assessmentbytheglobalforumontaxation.htm (2008).Google Scholar
Panousi, V., and Papanikolaou, D.. “Investment, Idiosyncratic Risk, and Ownership.” Journal of Finance, 67 (2012), 1113–1148.CrossRefGoogle Scholar
Parlour, C. A., and Winton, A.. “Laying off Credit Risk: Loan Sales Versus Credit Default Swaps.” Journal of Financial Economics, 107 (2013), 25–45.CrossRefGoogle Scholar
Petersen, M. A., and Rajan, R. G.. “Does Distance Still Matter? The Information Revolution in Small Business Lending.” Journal of Finance, 57 (2002), 2533–2570.CrossRefGoogle Scholar
Qiu, J., and Yu, F.. “The Market for Corporate Control and the Cost of Debt.” Journal of Financial Economics, 93 (2009), 505–524.CrossRefGoogle Scholar
Qiu, J., and Yu, F.. “Endogenous Liquidity in Credit Derivatives.” Journal of Financial Economics, 103 (2012), 611–631.CrossRefGoogle Scholar
Rhoades, S. A., and Rutz, R. D.. “Market Power and Firm Risk: A Test of the “Quiet Life” Hypothesis.” Journal of Monetary Economics, 9 (1982), 73–85.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 70 (2003), 295–311.CrossRefGoogle Scholar
Stulz, R. “Managerial Discretion and Optimal Financing Policies.” Journal of Financial Economics, 26 (1990), 3–27.CrossRefGoogle Scholar
UNCTAD. World Investment Report 2000: Global Value Chains: Investment and Trade for Development. New York and Geneva: UNCTAD (2013).Google Scholar