Credit Default Swaps and Mergers & Acquisitions: Evidence on Price Discovery Around Announcement Dates

Mergers and acquisitions (M&A) are among the most significant corporate events, often generating substantial changes in firms' risk profiles and market valuations. While previous research has extensively investigated the reaction of equity markets to M&A announcements, considerably less attention has been devoted to the informational role of the Credit Default Swap (CDS) market. Since CDS spreads reflect investors' perceptions of a firm's credit risk, they may incorporate information regarding upcoming transactions before it is fully reflected in other financial markets. This thesis examines whether the CDS market anticipates M&A announcements by analysing the behaviour of single-name CDS spreads of acquiring firms around the announcement date. Specifically, the study investigates whether abnormal movements in CDS spreads emerge prior to the public disclosure of the transaction, providing evidence of an anticipatory effect and contributing to the understanding of the price discovery process in credit markets. The empirical analysis employs the event study methodology. Expected CDS spreads are estimated using the constant mean model over a pre-event estimation window, while abnormal spreads are computed by comparing the observed CDS spreads during the event window with their expected values. Average abnormal spreads, cumulative abnormal spreads and statistical significance tests are then used to evaluate whether CDS spreads exhibit abnormal behaviour before and after M&A announcements. By focusing on the credit market rather than the equity market, this study contributes to the literature on market efficiency and price discovery, providing new evidence on the informational content of CDS spreads in the context of mergers and acquisitions.