Creditor Rights and Corporate Risk-taking

Viral 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)
Date: 2008-02
New Economics Papers: this item is included in nep-fmk and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Creditor rights and corporate risk-taking (2011)
Working Paper: Creditor rights and corporate risk-taking (2009)
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