The Impact of the Dodd-Frank Act on Acquisition Activity

The Dodd-Frank Act in 2010 increased ex ante downgrade threats without changing credit rated firms’ underlying credit quality. We show that the Act had negative impacts on credit rated firms’ acquisition activities, especially among speculative grade firms as they face greater downgrade-induced costs. The more selective acquisition strategies led to higher announcement returns and greater post-acquisition upgrade probabilities. Consistent with firms refraining from taking on overall acquisition risk rather than financial risk, we show significant reductions in both cash and stock settled deal making following Dodd-Frank. In sum, our study highlights that increased legal stringency on CRAs has important spillover effects on firms’ M&A activities.