How Do Stronger Creditor Rights Impact Corporate Acquisition Activity and Quality?
43 Pages Posted: 3 Apr 2021
Date Written: March 25, 2021
We exploit a quasi-natural experiment (the adoption of state anti-recharacterization (AR) laws) to study the effect of strengthened creditor rights on corporate mergers and acquisitions (M&A). We find that, following the passage of AR laws, firms significantly reduce M&A activities. This effect is stronger for firms with higher bankruptcy risk. Conditional on making an acquisition, M&A announcement returns to both shareholders and bondholders are larger for acquirers with high bankruptcy risk, indicating no evidence of wealth transfers. Our evidence suggests that ex-ante strengthened creditor rights prompt firms to conduct more value-enhancing deals.
Keywords: creditor rights, mergers and acquisitions, anti-recharacterization laws, bankruptcy, corporate investments, wealth transfer
JEL Classification: G21, G33, G34, K22
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