Foreign acquisition and credit risk : evidence from the U.S. CDS market

This paper empirically analyses the effect of foreign block acquisitions on the U.S. target firms' credit risk as captured by their CDS. The involvement of foreign investors leads to a significant increase in the target firms' CDS spreads. 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. I further find that acquired firms experience a significant increase in exposure to idiosyncratic stock volatility following acquisitions by foreign investors