The purpose of this paper is to examine how credit ratings affect corporate financial behavior from the perspective of merger and acquisition (M&A) decisions. The goal is to test the financing and supervisory effects of credit ratings and study the economic consequences of credit ratings in the context of China.
Using a sample of Chinese A-share listed companies over the 2008–2017 period, this paper empirically examines the effect of credit ratings on firms’ M&A decisions. The authors used a probit model for regression when they tested the effect of credit rating on M&A likelihood and a tobit model when they tested the effect of credit rating on M&A intensity.
First, rated enterprises tend to make more acquisitions compared with non-rated enterprises, consistent with the hypothesis that credit ratings alleviate financing constraints. Second, high-rated enterprises are more cautious toward M&As due to concerns about preserving their ratings, which indicates that credit ratings also play a supervisory role in the M&A process. Additional tests show that enterprises reduce M&A activity after a rating downgrade to avoid further deterioration in their ratings; this further supports the supervisory role of credit ratings.
This paper adds incremental evidence to the literature on the impact of credit ratings on corporate financial behavior and extends the literature on the factors influencing M&As. The authors provided empirical evidence from emerging capital markets for the financing and supervisory effects of credit ratings and provided theoretical guidance for promoting the stable, long-term development of China’s credit rating industry.
