Creditor Rights and Corporate Risk Taking
Speaker
Abstract
| We propose that stronger creditor rights in bankruptcy affect corporate investments by reducing corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions and of firms with low-recovery assets to acquire targets with high-recovery assets. These relations are strongest in countries where management is dismissed in reorganization. Diversifying acquisitions result in the acquirer’s performance being poorer in countries with stronger creditor rights, while no such relation exists for same-industry acquisitions. Further, in countries with stronger creditor rights, firms have lower cash-flow risk and lower leverage. These results are also observed in time-series analysis around changes in creditor rights. Our results identify a consequence of strong creditor rights: inhibiting management from undertaking risky investments. |
| The Erasmus Finance Seminar is jointly sponsored by ERIM and the Tinbergen Institute. |
| Contact information: |
| Viorel Roscovan |
