Credit Rating Changes and Post-M&A Firm Value: Assessing the importance of credit ratings changes as a motive for successful M&A

Abstract: This research shows the impact of credit rating change (thereafter CRC) announcements on the combined entities following mergers and acquisitions. In looking at the effect of CRC announcements on share prices, we measure the level of influence that a credit upgrade or downgrade has on the equity value of firms. Existing literature disputes the applicability of share price as a measure of value creation, preferring instead to measure effects on company fundamentals. By complimenting the research with impacts of CRC announcements on operational performance, this study also considers the level of economic value creation in firms post-M&A. We present evidence of statistically insignificant negative abnormal returns with downgrade announcements and insignificant positive abnormal returns to upgrade announcements. In addition, this thesis finds statistically significant negative abnormal long-term operating performance for downgrades, and less significant effects for upgrades. Comparing the findings to previous literature on either M&A or CRC announcements, the research discovers proportional result between abnormal equity returns and abnormal performance, thus the efficient market hypothesis applies. A small sample size is the primary limitation, and therefore future research is recommended.