Creditor rights and corporate risk-taking

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


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.

6 Reads
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: Two types of hernia appear to exist, a direct, cogenital type and an oblique indirect, acquired type. The congenital type will, in almost all instances, disappear by the age of three years, regardless of its size. It is unlikely that the indirect type of hernia will disappear; on the contrary, it is more likely to progress and become larger. It will, therefore, most probably require surgical repair. It is rarely possible to distinguich the two types at clinical examination, unless the hernia is quite large, but persistence after three years favors the oblique type, as does also marked downward displacement of the umbilicus with a clinical appearance of herniation descending from above. Since strangulation is a rarity in congenital umbilical hernia, operation is not warranted until the age of three years. Thereafer, the hernia is unlikely to disappear on its own. It is postulated that the wide variations in reported incidence, as compared with the figures in this study, may be ascribed to methods of patient selection. There was clear evidence of hernia in all instances in the present series; other workers have used less rigid criteria, for example, a defect admitting the finger was regarded as diagnostic of an umbilical hernia.
    Surgery, gynecology & obstetrics 03/1980; 150(2):187-92. DOI:10.1136/bmj.1.5443.1188-e
  • 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
  • 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.
    Journal of International Financial Management & Accounting 01/2012; DOI:10.1111/jifm.12033 · 0.33 Impact Factor
Show more