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The performance of acquisitions by high default risk bidders

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  • Bruyland, Evy
  • Lasfer, Meziane
  • De Maeseneire, Wouter
  • Song, Wei

Abstract

We investigate the takeover strategies of high default risk acquirers and their value impact. We find that these bidders select bigger, less profitable and unrelated targets, pursue transactions during recessions, and pay with shares by offering target shareholders high premiums. Their long-term buy-and-hold returns are extremely negative, and reflect fundamentally their substantial drop in profitability combined with high leverage. We show that the well-established long-run underperformance of acquiring firms is largely driven by this sub-set of acquirers. The results are similar when we use alternative measures of default risk and performance, and a global sample of non-US bidders.

Suggested Citation

  • Bruyland, Evy & Lasfer, Meziane & De Maeseneire, Wouter & Song, Wei, 2019. "The performance of acquisitions by high default risk bidders," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 37-58.
    • Handle: RePEc:eee:jbfina:v:101:y:2019:i:c:p:37-58
    DOI: 10.1016/j.jbankfin.2019.01.019
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    3. Janowicz Magdalena & Luty Piotr, 2019. "Is the Goodwill Recognised in a Business Combination an Indicator of the Future Profitability of the Combined Company?," Financial Sciences. Nauki o Finansach, Sciendo, vol. 24(4), pages 45-54, December.
    4. Ismailescu, Iuliana & Col, Burcin, 2022. "Cross-border M&As and credit risk: Evidence from the CDS market," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 51-73.
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    7. Sarfraz Hussain & Van Chien Nguyen & Quang Minh Nguyen & Huu Tinh Nguyen & Thu Thuy Nguyen, 2021. "Macroeconomic factors, working capital management, and firm performance—A static and dynamic panel analysis," Palgrave Communications, Palgrave Macmillan, vol. 8(1), pages 1-14, December.
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    Keywords

    Mergers and acquisitions; High default risk bidders; Long-term performance; Short-term market reaction; Agency conflicts; Distress;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • 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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