Acquisitions of Financially Distressed Firms: An Empirical Analysis

Abstract

Acquisitions of financially distressed firms are usually associated with debt restructuring of the target debt, and the deals can be implemented with or without the aid of the bankruptcy court. We find target stakeholders generally prefer to complete the acquisition without court help, unless the hold-out problem that resides in debt structures would jeopardize a deal outside of Chapter 11. Firms that choose to be acquired within Chapter 11 are found to have more debt contracts outstanding and more public debt. However, we find no evidence that firms with higher operating leases are more likely to be acquired within Chapter 11, suggesting that the potential benefit from lease contract renegotiation is not a major reason for Chapter 11 filings. We also find that target CEOs are more likely to retain their jobs following non-bankruptcy acquisitions or pre-negotiated acquisitions than in post-negotiated acquisitions, consistent with our conjecture that management benefits personally from arranging a sale as a resolution to the financial distress of the firm.

Keywords: Acquisition, Financial Distress, Chapter 11, Debt Structure, Operating Leases

JEL Classification: G20, G33, G34