Projected operating efficiencies, credit ratings and the creation of debt capacity

Abstract

We investigate how operating synergies from mergers and acquisitions (M&A) influence the acquiring firm’s debt capacity, credit ratings, and market valuation. Our analysis incorporates credit rating quality, revealing that investment-grade acquirers predominantly drive the positive relationship between synergy forecasts and debt issuance. This pattern reflects reduced information asymmetry and strengthens lender confidence. Further, we find that while increased debt issuance generally pressures credit ratings downward, this effect is reversed for high-credit-quality firms with credible synergy forecasts, allowing them to improve their ratings post-merger. Market reactions align with these findings, demonstrating more favorable abnormal returns for deals with high synergy projections that boost debt capacity. Robustness checks, including sample selection correction and alternative leverage measures, confirm the robustness and stability of these results. Our study highlights the critical role of credible synergy forecasts and credit quality in shaping financing strategies and market perceptions in the M&A context.