Distressed acquisitions: Evidence from European emerging markets

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Highlights

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    During 2007–2019, 23,213 distressed firms were rescued by acquisition in 17 European emerging markets.

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    This paper shows that the institutional quality is linked with lower probability of distressed acquisitions.

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    The effect of institutions increased after the financial crisis but declined as the economic situation improved.

Abstract

We analyze factors behind 23,213 distressed acquisitions in European emerging markets from 2007 to 2019. Besides the impact of financial ratios, legal form, ownership structure, firm size, and age, we emphasize the role of institutions and channels of their propagation. We show that the quality and enforcement of insolvency laws are linked with the lower probability of distressed acquisitions, followed by corruption control and progress in banking reforms. The impact of institutions is larger in less-advanced countries as compared to economically stronger ones. The effect of institutions increased after the financial crisis but declined as the economic situation improved.

Section snippets

Introduction, motivation and related literature

Acquisitions of firms under financial distress, namely distressed acquisitions, represent both challenges as well as significant opportunities for acquirers, and knowing what factors impact distressed acquisitions offers crucial and valuable insights (DePamphilis, 2019). However, research on determinants behind distressed acquisitions is quite limited and, in terms of the regional coverage, the literature mostly targets firms in developed countries. Evidence from emerging markets lags behind,

Data coverage, variables, and hypothesized impacts

With the aim of studying the distressed acquisition of firms and its relationship with country-level institutional quality, we employ a large dataset of business firms in European emerging economies. Our dataset consists of financial, firm-specific, and country-level institutional variables. The set of financial and firm-specific variables is extracted from the Bureau van Dijk's Orbis database.4

Empirical strategy

As we stated in the Introduction, our aim is to assess factors that significantly affect the decision to acquire a distressed firm. To empirically examine this research objective, we proceed in two stages that correspond to a Heckman two-stage probit model. In the first stage, we estimate the probability of a distressed firm's failure with a set of relevant variables. In the second stage, we employ a probability of the acquisition of a distressed firm as our dependent variable and analyze

First stage: probability of distress

In the first stage, we estimate the distress model in specification (1), where the dependent variable is the probability of firm failure. Since the primary interest lies in the second-stage results, we report the first-stage results in Appendix Table A3 and comment on them only briefly, with an emphasis on the results for all 17 countries.

In terms of the legal form, limited liability apparently represents a more vulnerable form, as it is linked to a somewhat higher increase in the probability

Conclusions

In this paper, we analyze what factors impact acquisitions of distressed firms in European emerging markets during and after the GFC (2007–2019). We identify 23,213 distressed acquisitions in a total of 17 European economies (alphabetically): Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, and Ukraine. Furthermore, we use a number of theoretically and empirically motivated

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    • We would like to thank Ruben Enikolopov (Editor), Bartosz Kabaciński, Piotr Kozarzewski, Petr Marek, Satoshi Mizobata, Holger Mueller, two anonymous referees, and participants at several presentations for their helpful comments and suggestions. Kočenda acknowledges the hospitality of the Kyoto Institute of Economic Research. We are also grateful to Eriko Yoshida for her research assistance and to Tammy Bicket for her editorial assistance. This research was financially supported by the Japan Society for the Promotion of Science (Grant Nos. 19KK0036 and 20H01489), the Japan Securities Scholarship Foundation, the Nomura Foundation, the Mitsubishi Foundation, and the Joint Usage and Research Center of the Institute of Economic Research, Hitotsubashi University (Iwasaki); and the Slovak Research and Development Agency (Grant No. APVV-18–0310) (Kočenda). The usual disclaimer applies.

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