Cross-border mergers and acquisitions and default risk

•We study the impact of cross-border mergers on acquirers' post-merger default risk.•Cross-border mergers decrease the level of default risk of the acquiring firms.•Managers take advantage of the overvaluation and volatility of their stock prices.•Managers use cross-border mergers to manage the extant risk of their firms.

We examine the impact of cross-border mergers on acquirers' post-merger default risk using a sample of 375 US acquiring firms from 1997 to 2011. After controlling for cultural, institutional, geographic and managerial factors between the US and target firm countries, we find that on average, cross-border transactions decrease the level of default risk of the acquiring firms. Our results are consistent with the asymmetric information hypothesis that managers take advantage of the overvaluation and volatility of their stock prices. We also observe that the geographic distance and industrial relatedness play significant roles in affecting post-merger default risk but find limited evidence indicating the relevance of institutional environments and cultural factors on changes in default risk. Managers use cross-border mergers to manage the extant risk of their firms. However, their incentives to use cross-border mergers to manage risk are mitigated by option compensation.