Does Threat of Takeover Affect Default Risk?

Abstract

We examine the impact of the threat of takeover on default risk. Using a sample of 46,236 firm year observations for US firms over the period 1994-2015, we find that the threat of takeover has a negative relation with default risk. We use difference-in-difference analysis to address potential endogeneity concerns and propensity score matching to control for self-selection bias. The results are robust to alternative measures of default risk and exclusion of the dot com and financial crisis periods. We identify improvement in performance and earnings quality in response to the threat of takeover as channels underlying our main result. The effect of the threat of takeover on default risk is more pronounced for firms with low information environment and institutional ownership. Our findings provide important insights for the market for corporate control as a disciplining mechanism in reducing default risk.