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The risk effects of acquiring distressed firms

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  • E. BRUYLAND
  • W. 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.

Suggested Citation

  • E. Bruyland & W. De Maeseneire, 2011. "The risk effects of acquiring distressed firms," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/742, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:11/742
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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. repec:arp:tjssrr:2019:p:1-10 is not listed on IDEAS
    3. 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.

    More about this item

    Keywords

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