How Do Stronger Creditor Rights Impact Corporate Acquisition Activity and Quality?

41 Pages Posted: 3 Apr 2021 Last revised: 27 Jul 2022

See all articles by Megan Rainville

Megan Rainville

Missouri State University

Emre Unlu

University of Nebraska at Lincoln

J. (Julie) Wu

University of Nebraska - Lincoln

Date Written: March 25, 2021

Abstract

We exploit a quasi-natural experiment (the adoption of state anti-recharacterization laws) to study the effect of strengthened creditor rights on corporate mergers and acquisitions. We find that, following the passage of anti-recharacterization laws, firms decrease overall acquisition activities. This effect is stronger for firms with worse agency problems. Announcement returns to shareholders are larger and post-merger operating cash flows are better for acquirers with weaker governance. Furthermore, returns to bondholders of these firms are also higher, indicating no wealth transfers. Taken together, our evidence suggests that ex-ante strengthened creditor rights can discipline firm managers to reduce value-destroying acquisitions and conduct higher quality deals.

Keywords: creditor rights, mergers and acquisitions, anti-recharacterization laws, bankruptcy, corporate investments, wealth transfer

JEL Classification: G21, G33, G34, K22

Suggested Citation

Rainville, Megan and Unlu, Emre and Wu, J. (Julie), How Do Stronger Creditor Rights Impact Corporate Acquisition Activity and Quality? (March 25, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3811533 or http://dx.doi.org/10.2139/ssrn.3811533

Megan Rainville

Missouri State University ( email )

901 South National Avenue
Springfield, MO 65897
United States

Emre Unlu

University of Nebraska at Lincoln ( email )

Lincoln, NE 68588
United States

J. (Julie) Wu (Contact Author)

University of Nebraska - Lincoln ( email )

Lincoln, NE 68588
United States

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