Creditor Rights and Corporate Risk-Taking

61 Pages Posted: 17 Apr 2008 Last revised: 1 Dec 2009

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Yakov Amihud

New York University - Stern School of Business

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Multiple version iconThere are 6 versions of this paper

Date Written: April 6, 2009

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.

Keywords: bankruptcy, international finance, corporate governance, investment policy

JEL Classification: G33, K12, G31, G24, D82

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Amihud, Yakov and Litov, Lubomir P., Creditor Rights and Corporate Risk-Taking (April 6, 2009). 3rd Annual Conference on Empirical Legal Studies Papers, Available at SSRN: https://ssrn.com/abstract=1103102 or http://dx.doi.org/10.2139/ssrn.1103102

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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Belgium

National Bureau of Economic Research (NBER) ( email )

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Yakov Amihud

New York University - Stern School of Business ( email )

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212-998-0720 (Phone)
212-995-4233 (Fax)

Lubomir P. Litov (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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