Does Threat of Takeover Affect Default Risk?

52 Pages Posted: 12 Mar 2019 Last revised: 18 Aug 2021

See all articles by Balasingham Balachandran

Balasingham Balachandran

Dept of Economics, Finance and Marketing, La Trobe Business School, La Trobe University; Financial Research Network (FIRN)

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Tony van Zijl

Victoria University of Wellington - Faculty of Commerce and Administration

Arfian Zudana

affiliation not provided to SSRN

Date Written: June 30, 2020

Abstract

We examine the impact of the threat of takeover on default risk. Using a sample of 46,236 firm year observations for US firms over the period 1994-2015, we find that the threat of takeover has a negative relation with default risk. We use difference-in-difference analysis to address potential endogeneity concerns and propensity score matching to control for self-selection bias. The results are robust to alternative measures of default risk and exclusion of the dot com and financial crisis periods. We identify improvement in performance and earnings quality in response to the threat of takeover as channels underlying our main result. The effect of the threat of takeover on default risk is more pronounced for firms with low information environment and institutional ownership. Our findings provide important insights for the market for corporate control as a disciplining mechanism in reducing default risk.

Keywords: Takeover Market, Default Risk, Information Asymmetry, Corporate Governance, Earnings Quality

JEL Classification: G34, G38, M41, M48

Suggested Citation

Balachandran, Balasingham and Duong, Huu Nhan and van Zijl, Tony and Zudana, Arfian, Does Threat of Takeover Affect Default Risk? (June 30, 2020). Available at SSRN: https://ssrn.com/abstract=3332740 or http://dx.doi.org/10.2139/ssrn.3332740

Balasingham Balachandran (Contact Author)

Dept of Economics, Finance and Marketing, La Trobe Business School, La Trobe University ( email )

Dept of Economics, Finance and Marketing,
La Trobe Business School, La Trobe University
Bundoora, Victoria 3086
Australia
+61394793103 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Tony Van Zijl

Victoria University of Wellington - Faculty of Commerce and Administration ( email )

RH 606, Pipitea Campus, 6th Floor, Rutherford Hous
23 Lambton Quay
Wellington
Australia

Arfian Zudana

affiliation not provided to SSRN

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
134
Abstract Views
1,285
rank
264,757
PlumX Metrics