Research news story

Creditor rights and corporate risk-taking

This latest piece of research by Viral V. Acharya, Yakov Amihud*, Lubomir Litov proposes that stronger creditor rights in bankruptcy codes reduce corporate risk-taking.

Employing country-level data, the research finds that strong creditor rights are associated with a greater propensity of firms to engage in diversifying mergers, and this propensity changes in response to changes in the country creditor rights. Also, in countries with stronger creditor rights companies' operating risk is lower, and acquirers with low-recovery assets prefer targets with high-recovery assets. These relationships are strongest in countries where management is dismissed in reorganization, suggesting an agency-cost effect.

An interesting possibility that emerges from the research results is that strong creditor rights may have a "dark" side in terms of their effect on corporate investments and attitude towards risk. Employing several methods, the research finds that stronger creditor rights in a country induce firms to take less risk and prefer diversifying acquisitions. If these actions would not have otherwise been taken by the firms, it follows that creditor rights have real effect on corporate decisions whose value effects may be questionable.

To view the research, click here.

Creditor Rights

Created: Friday 02 May 2008

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