TY - JOUR
T1 - Commitment or constraint? The effect of loan covenants on merger and acquisition activity
AU - Ambrocio, Gene
AU - Colak, Gonul
AU - Hasan, Iftekhar
N1 - Publisher Copyright:
© 2022 Elsevier Inc.
PY - 2022/6/6
Y1 - 2022/6/6
N2 - 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.
AB - 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.
KW - 512 Business and Management
KW - Mergers and acquisitions
KW - Takeover premium
KW - loan covenants
UR - http://www.scopus.com/inward/record.url?scp=85124120520&partnerID=8YFLogxK
UR - https://www.mendeley.com/catalogue/35f73eda-1525-37f2-8adb-51c1deb25528/
U2 - 10.1016/j.frl.2022.102711
DO - 10.1016/j.frl.2022.102711
M3 - Article
SN - 1544-6123
VL - 47
JO - Finance Research Letters
JF - Finance Research Letters
IS - B
M1 - 102711
ER -