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Why are distressed firms acquisitive?

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  • Zhang, Eden Quxian

Abstract

Acquisitions made by distressed firms are economically important. This paper explores the rationale behind such acquisitions in a quasi-natural experiment and identifies the causal link between bankruptcy risk and acquisitions. Upon an exogenous reduction in bankruptcy risk, distressed firms react by cutting 46% of cash spending on acquisitions, announcing fewer deals, and borrowing less for acquisition-related activities. The evidence suggests that distressed firms make acquisitions to diversify bankruptcy risk. These findings demonstrate a new effect of financial distress on firm investment—the pressure to meet debt obligations creates an incentive for firms to diversify through acquisitions.

Suggested Citation

  • Zhang, Eden Quxian, 2022. "Why are distressed firms acquisitive?," Journal of Corporate Finance, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:corfin:v:72:y:2022:i:c:s0929119921002480
    DOI: 10.1016/j.jcorpfin.2021.102126
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    2. Gong, Ning & Tao, Qizhi & Zhang, Wan, 2024. "Economic policy uncertainty, political connections, and M&As: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    3. Shengfeng Li & Hafiz Hoque & Jia Liu, 2022. "Investor Sentiment and Firm Capital Structure," Working Papers 2022-01, Swansea University, School of Management.
    4. Nejadmalayeri, Ali & Rosenblum, Aaron, 2022. "Distressed acquirers and the bright side of financial distress," International Review of Financial Analysis, Elsevier, vol. 83(C).

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    More about this item

    Keywords

    Acquisitions; Bankruptcy; Diversification; Corporate investment; Financial distress;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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