Distressed acquirers and the bright side of financial distress

Ali Nejadmalayeri and Aaron Rosenblum

International Review of Financial Analysis, 2022, vol. 83, issue C

Abstract: Extant literature states that managers who fear the consequences of financial distress may inhibit investments in profitable opportunities. Here, we posit that the career and reputational damages that distress and potential default cause are large enough to align the interests of managers and shareholders thus improving investment decisions. We find that financially distressed firms see a 3.5% higher market reaction to the announcement of acquisitions than non-distressed firms. This effect is stronger for poorly governed firms, consistent with the hypothesis that the large reputational cost of failure incentivizes managers to act in the best interest of their firm.

Keywords: Distress; Mergers and acquisitions; Executive career concerns; Reputational capita (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 G34 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:83:y:2022:i:c:s1057521922002575

DOI: 10.1016/j.irfa.2022.102303

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