Creditor Rights and Corporate Risk-Taking

42 Pages Posted: 9 Mar 2009 Last revised: 10 Jun 2011

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: May 25, 2011

Abstract

We propose that stronger creditor rights in bankruptcy affect corporate investment choice by reducing corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions that are value-reducing, to acquire targets whose assets have high recovery value in default, and to lower cash-flow risk. Also, corporate leverage declines when creditor rights are stronger. These relations are usually strongest in countries where management is dismissed in reorganization and are also observed over time following changes in creditor rights. Our results thus identify a potentially adverse consequence of strong creditor rights.

Keywords: creditor rights, investment policy, bankrutcy code

JEL Classification: G30, G31, G33

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Amihud, Yakov and Litov, Lubomir P., Creditor Rights and Corporate Risk-Taking (May 25, 2011). NYU Working Paper No. FIN-08-031, Available at SSRN: https://ssrn.com/abstract=1354518

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

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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