Mergers increase default risk

Craig H. Furfine, Richard J. Rosen*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

82 Scopus citations


We examine the impact of mergers on default risk. Despite the potential for asset diversification, we find that, on average, a merger increases the default risk of the acquiring firm. This result cannot solely be explained by the tendency for generally safe acquirers to purchase riskier targets or by the tendency of acquiring firms to increase leverage post-merger. Our evidence suggests that managerial motivations may play an important role. In particular, we find larger merger-related increases in risk at firms where CEOs have large option-based compensation, where recent stock performance is poor, and where idiosyncratic equity volatility is high. These results suggest that the increased default risk may arise from aggressive managerial actions affecting risk enough to outweigh the strong risk-reducing asset diversification expected from a typical merger.

Original languageEnglish (US)
Pages (from-to)832-849
Number of pages18
JournalJournal of Corporate Finance
Issue number4
StatePublished - Sep 2011


  • Asset diversification
  • Default risk
  • Mergers

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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