Creditor Rights and Corporate Risk-Taking

46 Pages Posted: 9 Jun 2008

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Yakov Amihud

New York University - Stern School of Business

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Multiple version iconThere are 6 versions of this paper

Date Written: February 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: Bankruptcy, Default, Diversification, Managerial turnover, Recovery

JEL Classification: G31, G32, G33, G34

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Amihud, Yakov and Litov, Lubomir P., Creditor Rights and Corporate Risk-Taking (February 2008). CEPR Discussion Paper No. DP6697, Available at SSRN: https://ssrn.com/abstract=1141019

Viral V. Acharya (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Centre for Economic Policy Research (CEPR) ( email )

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Yakov Amihud

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Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

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University of Pennsylvania - Wharton Financial Institutions Center

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