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Distressed acquirers and the bright side of financial distress

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  • Nejadmalayeri, Ali
  • Rosenblum, Aaron

Abstract

Extant literature states that managers who fear the consequences of financial distress may inhibit investments in profitable opportunities. Here, we posit that the career and reputational damages that distress and potential default cause are large enough to align the interests of managers and shareholders thus improving investment decisions. We find that financially distressed firms see a 3.5% higher market reaction to the announcement of acquisitions than non-distressed firms. This effect is stronger for poorly governed firms, consistent with the hypothesis that the large reputational cost of failure incentivizes managers to act in the best interest of their firm.

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  • Nejadmalayeri, Ali & Rosenblum, Aaron, 2022. "Distressed acquirers and the bright side of financial distress," International Review of Financial Analysis, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:finana:v:83:y:2022:i:c:s1057521922002575
    DOI: 10.1016/j.irfa.2022.102303
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    More about this item

    Keywords

    Distress; Mergers and acquisitions; Executive career concerns; Reputational capita;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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