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The Risk Effects of Acquiring Distressed Firms

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  • Evy Bruyland
  • Wouter de Maeseneire

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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Suggested Citation

  • Evy Bruyland & Wouter de Maeseneire, 2016. "The Risk Effects of Acquiring Distressed Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 43(9-10), pages 1297-1324, October.
    • Handle: RePEc:bla:jbfnac:v:43:y:2016:i:9-10:p:1297-1324
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    File URL: http://hdl.handle.net/10.1111/jbfa.2016.43.issue-9-10
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    Cited by:

    1. Cowan, Arnold R. & Salotti, Valentina & Schenck, Natalya A., 2022. "The long-term impact of bank mergers on stock performance and default risk: The aftermath of the 2008 financial crisis✰," Finance Research Letters, Elsevier, vol. 48(C).
    2. Nguyen, Hang Thi Dieu & Tsai, Hsiangping, 2024. "Relationship Advisors Guiding Financially Weak Targets in M&A Deals: Conflict of Interest and Reputation Concerns," Finance Research Letters, Elsevier, vol. 61(C).
    3. repec:arp:tjssrr:2019:p:1-10 is not listed on IDEAS
    4. Maslinawati Mohamad* & Surendranath Rakesh Jory & Nnamdi Madichie, 2018. "Acquisitions of Financially Constrained Targets," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 868-877:5.

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