Does Threat of Takeover Affect Default Risk?

Balachandran, B., Duong, H. N., van Zijl, T., & Zudana, A. E. (2022). Does the threat of takeover affect default risk? Journal of Business Finance & Accounting, 1–40. https://doi.org/10.1111/jbfa.12668

67 Pages Posted: 12 Mar 2019 Last revised: 12 Dec 2022

See all articles by Balasingham Balachandran

Balasingham Balachandran

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 - Te Herenga Waka - Faculty of Commerce and Administration

Arfian Zudana

affiliation not provided to SSRN

Date Written: November 15, 2022

Abstract

We examine the impact of the threat of takeovers on default risk. Using a sample of 50,189 firm year observations for US firms over the period 1990-2015, we find that the threat of takeovers 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. Our results also hold after controlling for G-index and E-index. We identify improvement in performance and earnings quality in response to the threat of takeovers as channels underlying our main result. The effect of the threat of takeovers on default risk is more pronounced for firms with opaque information environment and low 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? (November 15, 2022). Balachandran, B., Duong, H. N., van Zijl, T., & Zudana, A. E. (2022). Does the threat of takeover affect default risk? Journal of Business Finance & Accounting, 1–40. https://doi.org/10.1111/jbfa.12668, Available at SSRN: https://ssrn.com/abstract=3332740 or http://dx.doi.org/10.2139/ssrn.3332740

Balasingham Balachandran (Contact Author)

La Trobe Business School, La Trobe University ( email )

La Trobe Business School
La Trobe University
Bundoora, Victoria 3086
Australia

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 - Te Herenga Waka - 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

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