Creditor rights and corporate risk-taking

Viral Acharya, Yakov Amihud and Lubomir Litov

Journal of Financial Economics, 2011, vol. 102, issue 1, 150-166

Abstract: We propose that stronger creditor rights in bankruptcy affect corporate investment choice 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 that are value-reducing, to acquire targets whose assets have high recovery value in default, and to lower cash-flow risk. Also, corporate leverage declines when creditor rights are stronger. These relations are usually strongest in countries where management is dismissed in reorganization and are also observed over time following changes in creditor rights. Our results thus identify a potentially adverse consequence of strong creditor rights.

Keywords: Bankruptcy; code; Corporate; reorganization; Investment; Diversification (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (302)

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Related works:
Working Paper: Creditor rights and corporate risk-taking (2009)
Working Paper: Creditor Rights and Corporate Risk-taking (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:102:y:2011:i:1:p:150-166

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