Bad Luck or Bad Policy : Why Do Firms Fail?

This paper investigates the effect of an aggressive corporate growth strategy on the failure risk of a firm using information on firm-level mergers and acquisitions (Mamp;A) activities. I find that excessive acquisitiveness relative to an industry benchmark explain more variations in the failure risk of firms than exogenous economic disturbances. Excessive Mamp;A activities are associated with a rise in immediate debt obligations and a fall in liquid assets to finance these obligations. This mismatch between debt maturity and asset liquidity translates into an increased amount of default risk for hyperactive acquirers. These results suggest that traditional line of argument - quot;Blame It on the Market Tsunamiquot; - may not be well grounded and firms need to carefully examine their investment and financing policies in good times to cushion against shocks in bad times