The Risk Effects of Acquiring Distressed Firms |
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| Authors: | Evy Bruyland Wouter de Maeseneire |
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| Institution: | 1. Both authors are at Vlerick Business School, Ghent, Belgium and at Ghent University. The second author is additionally at Erasmus University Rotterdam. The authors greatly appreciate the helpful comments and suggestions of Eric De Bodt, Olivier De Jonghe, Marc Deloof, Marie Dutordoir, Meziane Lasfer, Mathieu Luypaert, Sophie Manigart, Ronald Masulis, Sara Moeller, Karin Thorburn, Tom Vanacker, Cynthia Van Hulle, Elisabeth Van Laere and seminar participants at the Day of Scientific Economic Research (VVE‐day) 2011, Antwerp;2. the Corporate Finance Day 2011, Lille;3. the Belgian Financial Research Forum 2012, Antwerp;4. Midwest Finance Association (MFA) 2012, New Orleans;5. Financial Management Association (FMA) 2012, Istanbul;6. and European Financial Management Association (EFMA) 2012, Barcelona. The Associate Editor of this journal (R. Powell) and an anonymous referee provided excellent feedback that helped us significantly improving the paper, for which we are grateful. Financial support from the Agency for Innovation by Science and Technology (IWT), the Policy Research Centre for Entrepreneurship and International Entrepreneurship (STOIO), Vlerick Academic Research Fund and Hercules Fund is also gratefully acknowledged. |
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| Abstract: | Existing research shows that bidder default risk increases following acquisitions due to a rise in post‐acquisition leverage and managerial risk‐taking actions offsetting the potential for asset diversification. This study examines whether the risk effects of acquiring distressed targets are fundamentally different and investigates possible explanations for any dissimilarities. Bidders often acquire relatively smaller distressed targets in domestic and related industries and have a higher initial target stake and more financial flexibility, thereby minimizing risk exposure. Controlling for several characteristics of bidder investment behaviour in both types of deals, however, we find that the increase in bidder default risk is substantially larger when acquiring distressed firms. |
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| Keywords: | mergers and acquisitions distress default risk volatility risk factors G32 G33 G34 |
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