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The risk effects of acquiring distressed firms

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  • E. BRUYLAND

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  • W. DE MAESENEIRE
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    Abstract

    We examine the impact of distressed acquisitions on acquirer volatility and default risk for a worldwide sample of distressed firms using several risk measures. We find that, on average, absolute levels of historical and implied volatility do not change following a distressed acquisition. However, distressed acquisitions generate a significant increase in relative total, systematic and idiosyncratic volatility and default risk, hence risk rises for both shareholders and bondholders. In particular, we show that high market-to-book acquirers, frequent acquirers, low-risk acquirers, higher acquisition premia and deals closed during bull markets are associated with higher levels of post-acquisition risk. Interestingly, high-risk acquirers experience a significant reduction in volatility and default risk. Consequently, risk changes cannot exclusively be explained by transferring risk from distressed target to acquirer. Our results suggest that bidder pre-acquisition levels of performance and risk and market conditions affect the type of distressed acquisitions and consequently the risk effects in such transactions.

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    File URL: http://www.feb.ugent.be/nl/Ondz/wp/Papers/wp_11_742.pdf
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    Bibliographic Info

    Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 11/742.

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    Length: 42 pages
    Date of creation: Sep 2011
    Date of revision:
    Handle: RePEc:rug:rugwps:11/742

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    Related research

    Keywords: Distressed acquisitions; M&A; Default risk; Volatility; Risk factors;

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