Distressed Acquisitions: Evidence from European Emerging Markets

Abstract

We analyze factors behind 23,213 distressed acquisitions in European emerging markets from 2007-2019. 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 lessadvanced countries as compared to economically stronger ones. The effect of institutions increased after the financial crisis but declined as the economic situation improved.

Legal Weakness, Investment Risks, and Distressed Acquisitions: Evidence from Russian Regions

“…Consistent with the arguments above, Iwasaki et al (2021) demonstrated that the quality and enforcement of insolvency laws are negatively associated with the probability of distressed acquisitions in European emerging markets, including Russia. In other words, they found that national-level institutional quality can effectively explain the differences in the frequency of distressed acquisitions across Eastern Europe.…”

“…Therefore, in order to fully elucidate the determinants of distressed acquisitions in a country, the perspective of empirical analysis should be directed not only to national-level factors but also to those in regions. In this paper, we expand on the findings of Iwasaki et al (2021) by addressing this issue.…”

“…As we will report later, however, the frequency of acquisition of failed firms varies markedly across Russian regions. The empirical framework of Iwasaki et al (2021) is not capable of explaining this phenomenon. Firms' institutional and other management environments have a multilayered structure from the national to the regional level.…”

“…Furthermore, in their empirical analysis, Iwasaki et al (2021) regressed the probability of distressed acquisitions in 17 European emerging markets during the period of 2007-2019 on a series of firm-level attributes and the national-level institutional quality observed in 2006, proving the high predictability of the initial conditions on the probability of distressed acquisitions. While the empirical method employed by Iwasaki et al (2021) is similar to a survival analysis and is, thus, effective in avoiding or significantly mitigating the issue of potential endogeneity, 2 it raises the question of whether their finding that initial conditions remain effective over a decade can be replicated. In this paper, we question whether the empirical approach of Iwasaki et al (2021) is valid even if we restrict our target country to Russia and use institutional quality variables at the regional rather than the national level.…”

“…While the empirical method employed by Iwasaki et al (2021) is similar to a survival analysis and is, thus, effective in avoiding or significantly mitigating the issue of potential endogeneity, 2 it raises the question of whether their finding that initial conditions remain effective over a decade can be replicated. In this paper, we question whether the empirical approach of Iwasaki et al (2021) is valid even if we restrict our target country to Russia and use institutional quality variables at the regional rather than the national level.…”