Impact of vertical mergers on rivals' cost of debt

Abstract

We investigate the impact of vertical mergers on bank loans of acquirers' and targets' rivals. Following a vertical merger, these rivals experience higher interest rate spreads on bank loans, shorter loan maturities, and more stringent contract covenants. We observe the increase in the cost of debt whether or not the merger is part of an industry merger wave, mitigating concerns that unobserved industry factors drive our findings. While vertical mergers can foreclose markets for rivals, they can also create efficiencies for the merging firms by reducing the holdup problem in relationship-specific investments. Utilizing asset specificity measures to assess the severity of the holdup problem, we find that rivals' cost of debt increases when vertical mergers are more likely motivated by foreclosure rather than efficiency motives.