Creditor rights and corporate risk-taking

Viral Acharya, Yakov Amihud and Lubomir Litov

No 15569, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the link between creditor rights and firms' investment policies, proposing that stronger creditor rights in bankruptcy reduce corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions, which result in poorer operating and stock-market abnormal performance. In countries with strong creditor rights, firms also have lower cash flow risk and lower leverage, and there is greater propensity of firms with low-recovery assets to acquire targets with high-recovery assets. These relationships are strongest in countries where management is dismissed in reorganization, and are observed in time-series analysis around changes in creditor rights. Our results question the value of strong creditor rights as they have an adverse effect on firms by inhibiting management from undertaking risky investments.

JEL-codes: G31 G32 G33 G34 (search for similar items in EconPapers)
Date: 2009-12
New Economics Papers: this item is included in nep-bec
Note: CF LE
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Citations: View citations in EconPapers (9)

Published as Acharya, Viral V. & Amihud, Yakov & Litov, Lubomir, 2011. "Creditor rights and corporate risk-taking," Journal of Financial Economics, Elsevier, vol. 102(1), pages 150-166, October.

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Related works:
Journal Article: Creditor rights and corporate risk-taking (2011)
Working Paper: Creditor Rights and Corporate Risk-taking (2008)
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