Does Threat of Takeover Affect Default Risk?

We find that the threat of takeover has a negative relation with default risk. The result is robust to alternative estimation methods, different measures of default, exclusion of the financial crisis period and over a number of sub-periods. We identify improvement in performance and earnings quality in response to the threat of takeover as channels underlying our main result. We find that the threat of takeover on default risk is more pronounced for firms with low information asymmetry and institutional ownership. Our findings provide important insights for the market for corporate control as a disciplining mechanism in reducing default risk