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| Author: | Acharya, V.V. Amihud, Y. Litov, L. |
| Title: | Creditor rights and corporate risk-taking |
| Journal: | Journal of Financial Economics
2011 : OCT, VOL 102:1 p.150-166 |
| Index terms: | bankruptcy investment diversification |
| Freeterms: | corporate reorganization acquisitions |
| Language: | eng |
| Abstract: | We propose stronger creditor rights in bankruptcy to affect corporate investment choice by reducing corporate risk-taking. In cross-country analysis, it is found that stronger creditor rights cause greater propensity of companies to engage in diversifying acquisitions that are value-reducing, in order to acquire targets whose assets have high recovery value in default, and to lower cash-flow risk. Also, corporate leverage declines as creditor rights become stronger. These relations tend to be strongest in countries where management is dismissed in reorganization and are also observed over time as creditor rights change. The results thus identify a potentially harmful consequence of strong creditor rights. |
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