The Performance of Acquisitions by High Default Risk Bidders
56 Pages Posted: 25 Jan 2019
Date Written: January 22, 2019
We investigate the takeover strategies of high default risk acquirers and their value impact. We find that these bidders select bigger, less profitable and unrelated targets, pursue transactions during recessions, and pay with shares by offering target shareholders high premiums. Their long-term buy-and-hold returns are extremely negative, and reflect fundamentally their substantial drop in profitability combined with high leverage. We show that the well-established long-run underperformance of acquiring firms is largely driven by this sub-set of acquirers. The results are similar when we use alternative measures of default risk and performance, and a global sample of non-US bidders.
Keywords: Mergers and Acquisitions, High Default Risk Bidders, Long-Term Performance, Short-Term Market Reaction, Agency Conflicts, Distress
JEL Classification: G32, G33, G34
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