How Do Stronger Creditor Rights Impact Corporate Acquisition Activity and Quality?

Abstract

We exploit a quasi-natural experiment (the adoption of state anti-recharacterization (AR) laws) to study the effect of strengthened creditor rights on corporate mergers and acquisitions (M&A). We find that, following the passage of AR laws, firms significantly reduce M&A activities. This effect is stronger for firms with higher bankruptcy risk. Conditional on making an acquisition, M&A announcement returns to both shareholders and bondholders are larger for acquirers with high bankruptcy risk, indicating no evidence of wealth transfers. Our evidence suggests that ex-ante strengthened creditor rights prompt firms to conduct more value-enhancing deals.