Acquired Downgrades?

Financial Markets and Corporate Governance Conference (FMCG 2023), Melbourne, Australia, April 12-14, 2023

We analyze corporate acquisition announcements and the feedback of credit rating agencies by placing the acquirer’s issuer rating under formal review for a potential change. We show that acquisitions are more likely to be withdrawn if the firm’s rating is placed on review for downgrade. Focusing on completed acquisitions, deals associated with reviews for downgrade need approximately 40% more time to be completed, and acquirers are twice as likely to be downgraded in the first two years (41% versus 23%). The stock market considers the probability of an acquirer’s downgrade as deals with increased downgrade risk show lower abnormal announcement returns. We do not find evidence that reviews of rating agencies are anticipated by firms.