Creditor Rights and Corporate Risk-taking

Viral V. Acharya (), Yakov Amihud and Lubomir P. Litov

No 6697, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose that stronger creditor rights in bankruptcy reduce corporate risk-taking. Employing country-level data, we find that strong creditor rights are associated with a greater propensity of firms to engage in diversifying mergers, and this propensity changes in response to changes in the country creditor rights. Also, in countries with stronger creditor rights companies’ operating risk is lower, and acquirers with low-recovery assets prefer targets with high-recovery assets. These relationships are strongest in countries where management is dismissed in reorganization, suggesting an agency-cost effect. Our results suggest that there might be a "dark" side to strong creditor rights in that they can induce costly risk avoidance in corporate policies. Thus, stronger creditor rights may not necessarily be optimal.

Keywords: Bankruptcy; Default; Diversification; Managerial turnover; Recovery (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 G34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-reg
Date: 2008-02
View list of references View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP6697.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:6697

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP6697.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().