55 Pages Posted: 25 Sep 2014
Date Written: August 2014
Firms that buy distressed and bankrupt companies or some of these companies' assets earn excess returns that are at least 1.6 percentage points higher than when they make regular acquisitions. These returns come at the expense of the target firm's shareholders, while overall wealth gains are not affected. Returns to acquirers of distressed assets are higher when fewer large firms operate in the target firm's industry, and when firms in the target's industry have lower liquidity, and are financially constrained, thus limiting the number of potential buyers. They are lower when the M&A market in the target firm's industry is more vibrant, when the target's assets have more alternative uses, and when the economy is doing well. This evidence is consistent with the view that some firms can take advantage of fire sales by distressed and bankrupt companies needing to sell assets while restructuring.
Keywords: bankruptcy, distress, fire sales, mergers and acquisitions, restructuring
JEL Classification: G14, G32, G33, G34
Suggested Citation: Suggested Citation