The risk effects of acquiring distressed firms
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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