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

Gene Ambrocio, Gonul Colak, Iftekhar Hasan*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

3 Citations (Scopus)


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.
Original languageEnglish
Article number102711
Peer-reviewed scientific journalFinance Research Letters
Issue numberB
Publication statusPublished - 06.06.2022
MoE publication typeA1 Journal article - refereed


  • 512 Business and Management
  • Mergers and acquisitions
  • Takeover premium
  • loan covenants

Areas of Strength and Areas of High Potential (AoS and AoHP)

  • AoS: Financial management, accounting, and governance


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