Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s

Abstract

We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns. Additionally, target bonds have significantly larger returns when the target's rating is below the acquirer's, when the combination is anticipated to decrease target risk or leverage, and when the target's maturity is shorter than the acquirer's. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s.

Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions

“…However, our evidence is compatible with the interpretation of the G-index as a measure of the antitakeover strength of the firm, and that takeovers are beneficial to bondholders (Billett et al, 2004;Qiu and Yu, 2009). …”

“…For example, shirking would be harmful to both bondholders and shareholders. Taking on low-risk projects or engaging in conglomerate mergers, however, may benefit bondholders due to their concave payoff structure and the coinsurance effect associated with diversified acquisitions (Billett et al, 2004). Although there is debate in the literature regarding the risk-taking preference of managers/directors (Amihud and Lev, 1981;Holmstrom and Costa, 1986;Hirshleifer and Thakor, 1992;Adams et al, 2005), the evidence largely supports the proposition that managers/directors prefer conservative investment strategies that are suboptimal from shareholders' perspective, due to their concerns for the private benefits from control and their non-diversified firm-specific human capital (Bertrand and Mullainathan, 2003;John et al, 2008;Kempf et al, 2009;Laeven and Levine, 2009;Pathan, 2009).…”

Credit Ratings and Acquisitions

“…Firms that make decisions that increase the likelihood of default or decrease recovery given default will face a greater risk of being downgraded, leading to higher debt costs, and a negative stock price reaction upon the downgrade (see Hand, Holthausen, and Leftwich, 1992). This is exactly what previous research finds for acquisitions: leverage and the associated default risk increase, on average, following acquisitions (see, for example, Billett, King, and Mauer, 2004;Furfine and Rosen, 2011). 2 These are likely accompanied with credit rating downgrades.…”

“…Mergers and acquisitions are known to increase acquirers' default risk and leverage levels (see, for example, Billett, King, and Mauer, 2004;Furfine and Rosen, 2011). Therefore, such transactions are likely to put downward pressure on acquirers' credit ratings in the post-merger period.…”

Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

“…R&D investment is risky and therefore may not benefit creditors as much as capital expenditure investment. Acquisitions, as shown in Billett, King, and Mauer (2004), in fact destroy creditor value. Therefore, R&D investment and acquisition expenses may not be subject to debt overhang.…”