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Creditor Rights and Corporate Risk-Taking

Viral V. Acharya
London Business School - Institute of Finance and Accounting; Stern School of Business; Centre for Economic Policy Research (CEPR)

Yakov Amihud
New York University - Stern School of Business

Lubomir P. Litov
Washington University, St. Louis - John M. Olin School of Business; Financial Institutions Center, Wharton School, University of Pennsylvania


March 5, 2008


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: international mergers and acquisitions, bankruptcy code, reorganization, risk taking

JEL Classifications: G31, G32, G33, G34

Working Paper Series

Date posted: January 18, 2008 ; Last revised: April 23, 2008

Suggested Citation

Acharya, Viral V., Amihud, Yakov and Litov, Lubomir P., Creditor Rights and Corporate Risk-Taking (March 5, 2008). Available at SSRN: http://ssrn.com/abstract=1085195


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Contact Information

Viral V. Acharya (Contact Author)
London Business School - Institute of Finance and Accounting ( email )
Sussex Place
Regent's Park
London NW1 4SA United Kingdom
+44 20 7262 5050 x3535 (Phone)
+44 20 7724 3317 (Fax)
Stern School of Business ( email )
44 West 4th Street
New York, NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR United Kingdom
Yakov Amihud
New York University - Stern School of Business ( email )
44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0720 (Phone)
212-995-4233 (Fax)
Lubomir P. Litov
Washington University, St. Louis - John M. Olin School of Business ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
HOME PAGE: http://www.olin.wustl.edu/faculty/litov
Financial Institutions Center, Wharton School, University of Pennsylvania ( email )
2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States
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References: 42
Citations: 9

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