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The Risk Effects of Acquiring Distressed Firms
Author(s) -
Bruyland Evy,
de Maeseneire Wouter
Publication year - 2016
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12210
Subject(s) - leverage (statistics) , diversification (marketing strategy) , business , flexibility (engineering) , financial distress , default risk , financial risk , asset (computer security) , monetary economics , finance , economics , financial system , marketing , credit risk , management , machine learning , computer science , computer security
Existing research shows that bidder default risk increases following acquisitions due to a rise in post‐acquisition leverage and managerial risk‐taking actions offsetting the potential for asset diversification. This study examines whether the risk effects of acquiring distressed targets are fundamentally different and investigates possible explanations for any dissimilarities. Bidders often acquire relatively smaller distressed targets in domestic and related industries and have a higher initial target stake and more financial flexibility, thereby minimizing risk exposure. Controlling for several characteristics of bidder investment behaviour in both types of deals, however, we find that the increase in bidder default risk is substantially larger when acquiring distressed firms.