Article

Creditor rights and corporate risk-taking

National Bureau of Economic Research, Inc, NBER Working Papers 01/2009;
Source: RePEc

ABSTRACT We analyze the link between creditor rights and firms’ investment policies, proposing that stronger creditor rights in bankruptcy reduce corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions, which result in poorer operating and stock-market abnormal performance. In countries with strong creditor rights, firms also have lower cash flow risk and lower leverage, and there is greater propensity of firms with low-recovery assets to acquire targets with high-recovery assets. These relationships are strongest in countries where management is dismissed in reorganization, and are observed in time-series analysis around changes in creditor rights. Our results question the value of strong creditor rights as they have an adverse effect on firms by inhibiting management from undertaking risky investments.

0 Bookmarks
 · 
92 Views
  • [Show abstract] [Hide abstract]
    ABSTRACT: This paper examines the effect of insider trading restrictions on corporate risk-taking. Using a cross-country sample of 38 countries over the 1990 to 2003 period, we find that corporate risk-taking is positively related to insider trading restrictions. This finding is robust to alternative regression specifications and sample periods, to the use of alternative measures of insider trading restrictions and risk-taking incentives, and to controls for possible endogeneity. Further investigation suggests that the relation between insider trading restrictions and corporate risk-taking is influenced by cross-sectional differences in stock market development and legal origin, and that the increase in risk-taking is beneficial to firms. In conclusion, this paper highlights the role of insider trading restrictions as an important determinant of corporate risk-taking.
    Pacific-Basin Finance Journal 11/2014; DOI:10.1016/j.pacfin.2014.11.004 · 0.55 Impact Factor
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: This study examines the impact of creditor rights on cash holdings using a sample of firms from 48 countries. We argue that creditor rights affect the willingness of lenders to provide credit, which in turn affects the need for internal liquidity and cash holdings. Consistent with this, we find that corporate cash holdings decline with the strength of creditor rights. We also find that this relation depends on the quality of country governance. Among well-governed countries, firms hold less cash as creditor rights strengthen. In contrast, cash holdings increase with creditor rights in poorly governed countries. In these countries, it appears that the fear of expropriation motivates creditors with stronger rights to require higher levels of cash holding by borrowers.
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: We argue that the Merton (1974) model’s relatively high ability to forecast bankruptcy stems from its ability to capture either the chance of net worth dropping below an externally-imposed threshold or of an economic insolvency. Using unique bankruptcy data from fifteen countries, our evidence suggests that model-implied default risk estimates are more informative if a firm’s net worth is constrained by covenants. In contrast, we only find weak evidence that model assumptions presumed to be important for capturing economic insolvency risk matter. Finally, asset liquidity and the efficiency of the variables used in calibration also relate to forecasting power.
    SSRN Electronic Journal 02/2011; DOI:10.2139/ssrn.1585687