Why are distressed firms acquisitive?

Eden Quxian Zhang

Journal of Corporate Finance, 2022, vol. 72, issue C

Abstract: Acquisitions made by distressed firms are economically important. This paper explores the rationale behind such acquisitions in a quasi-natural experiment and identifies the causal link between bankruptcy risk and acquisitions. Upon an exogenous reduction in bankruptcy risk, distressed firms react by cutting 46% of cash spending on acquisitions, announcing fewer deals, and borrowing less for acquisition-related activities. The evidence suggests that distressed firms make acquisitions to diversify bankruptcy risk. These findings demonstrate a new effect of financial distress on firm investment—the pressure to meet debt obligations creates an incentive for firms to diversify through acquisitions.

Keywords: Acquisitions; Bankruptcy; Diversification; Corporate investment; Financial distress (search for similar items in EconPapers)
JEL-codes: G31 G33 G34 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:72:y:2022:i:c:s0929119921002480

DOI: 10.1016/j.jcorpfin.2021.102126

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