The risk effects of acquiring distressed firms
AbstractWe 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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Bibliographic InfoPaper 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.
Length: 42 pages
Date of creation: Sep 2011
Date of revision:
Distressed acquisitions; M&A; Default risk; Volatility; Risk factors;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-18 (All new papers)
- NEP-BEC-2012-01-18 (Business Economics)
- NEP-COM-2012-01-18 (Industrial Competition)
- NEP-RMG-2012-01-18 (Risk Management)
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