Creditor Rights and Corporate Risk-Taking

61 Pages Posted: 3 Nov 2008 Last revised: 1 Dec 2009

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: September 1, 2009

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.

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Amihud, Yakov and Litov, Lubomir P., Creditor Rights and Corporate Risk-Taking (September 1, 2009). NYU Working Paper No. FIN-07-037, Available at SSRN: https://ssrn.com/abstract=1293623

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 )

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Yakov Amihud

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Lubomir P. Litov

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University of Pennsylvania - Wharton Financial Institutions Center

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