5. Conclusion
The main purpose of this study is to investigate how the firms' overall financial risk rather than just debt might be linked in the context of takeovers. This paper deepens the understanding of firm's financial risk and takeover activities, providing a new angle on the explanations of stockholders' wealth effects in mergers and acquisitions.
Our results show that acquirers exhibit low financial risk regardless of whether the measure was Altman's Z-score or BSM's default risk. On average, acquirers have extremely low probability that they will go into bankruptcy. Default risk demonstrates a more powerful effect on the acquirer's successful takeover probabilities than the Z-score valuation. There exists a negative relation between acquirers' default risk and the successful takeover probability. The negative correlation mainly comes from firms with low default risk. For these firms, the lower default risk the acquirer has, the higher successful takeover probabilities. Firms with low default risk show higher successful takeover probability of 82%, while firms with high default risk only yield a successful takeover probability of 38%.
On the other hand, we find that takeovers create value for acquirers, in particular for acquirers with high default risk. These high default risk acquirers, even though they have relatively lower successful takeover probabilities, are most likely to be extreme winners if they are successful in taking over the targets. In addition, high default risk acquirers tend to have smaller size, lower interest coverage and debt ratio, lower degree of diversification and higher stock volatility.
