Mergers and Acquisitions and Default Risk: Evidence from Western European Financial Sector

Abstract: The purpose of this paper is to examine the impact of mergers and acquisitions on the default risk of acquiring companies. The sample consists of 276 transactions carried out between 2010 and 2018 by acquirers from Western European financial sector. We estimate the acquirer’s default risk using Merton Distance-to-Default model and further regress a set of independent variables with the changes in default risk in order to find out what contributes to these changes. On average, we find these transactions to be rather risk-neutral. Breaking down the whole sample to smaller sub-samples reveals that acquirers who have high default risk before the deal experience significant decreases in their default risk. Results from the regression analysis indicate the Merton model being more sensitive to, newly introduced variable, change in idiosyncratic risk than to change in leverage. We found no significant results indicating crossindustry diversification effects, whereas cross-border deals were decreasing the default risk. Outside the main discoveries of our study, our findings indicate prior idiosyncratic risk, prior leverage, and relative transaction size to be increasing the default risk. Another risk-reducing factor beside cross-border characteristic was cash payment. The found evidence casts yet another doubt upon M&A deals from acquirers' standpoint, questioning their role as reasonable investments.