Commitment or constraint? The effect of loan covenants on merger and acquisition activity

Ambrocio, Gene, Colak, Gonul and Hasan, Iftekhar (2022) Commitment or constraint? The effect of loan covenants on merger and acquisition activity. Finance Research Letters. a102711. ISSN 1544-6123

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Abstract

We investigate how loan covenants associated with potential target firms affect takeover deals. We propose two possible channels. Under a discipline channel, the target firm becomes an attractive candidate for takeovers and merger deals are facilitated. Under a constraint channel, covenants hinder merger activity. We find support for the latter channel. Takeover likelihood is lower, deal failures are more common, the likelihood of price renegotiation is higher, and acquisition premium is lower when the target is bound by covenants. Covenant tightness exacerbates this effect.

Item Type: Article
Schools and Departments: University of Sussex Business School > Accounting and Finance
SWORD Depositor: Mx Elements Account
Depositing User: Mx Elements Account
Date Deposited: 22 Feb 2022 08:04
Last Modified: 22 Feb 2022 08:18
URI: http://sro.sussex.ac.uk/id/eprint/104483

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