Title: Acquisitions of bankrupt and distressed firms

Authors: Elena Precourt; Henry Oppenheimer

Addresses: College of Business, Bryant University, 1150 Douglas Pike, Smithfield, RI 02917, USA ' College of Business Administration, University of Rhode Island, Ballentine Hall, 7 Lippitt Road, Kingston, RI 02881-0802, USA

Abstract: We focus on acquisitions of bankrupt firms and firms that recently emerged from Chapter 11 and compare these firms with acquired distressed firms to determine whether or not transaction timing plays a role in the outcomes of the mergers. We analyse deal premiums (or lack thereof) and evaluate post-merger operating cash flows to determine whether or not timing of the transactions impacts their effectiveness and success. We find that distressed targets sell their assets at a premium or at a discount smaller than bankrupt firms do, thereby benefiting from acquisitions more than bankrupt targets. We also find that abnormal post-merger cash flow and cumulative abnormal return changes are more pronounced for bankrupt than distressed firms, indicating that acquisitions in Chapter 11 add greater economic value for both target and its acquirer than do acquisitions outside of bankruptcy. We observe post-merger market performance improvements for bankrupt and not distressed firms.

Keywords: mergers and acquisitions; M&A; Chapter 11 reorganisation; corporate bankruptcy; financial distress; bankrupt firms; distressed firms; transaction timing; deal premiums; post-merger operating cash flows; abnormal returns; economic value.

DOI: 10.1504/IJBD.2016.075453

International Journal of Bonds and Derivatives, 2016 Vol.2 No.1, pp.1 - 39

Received: 14 May 2015
Accepted: 03 Jun 2015
Published online: 23 Mar 2016 *

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