The Impact of Shareholder Power on Bondholders: Evidence from Mergers and Acquisitions

Abstract

Takeovers result in the transfer of bondholders' claims from the target to the acquiring firm, providing a setting to examine the impact of a change in shareholder power on bondholders. We find that an increase in the holdings of the top 5 acquirer institutional owners, a measure of shareholder power, from the 1st to the 3rd quartile in our sample is associated with an economically significant increase of 0.74% in excess returns to target bondholders. This supports the view that stronger shareholder power, through superior monitoring of managers, improves collateral values. Thus, good corporate governance can be beneficial to bondholders as well. Our findings, which contradict prior work, are robust to various proxies for shareholder power, adjustments for endogeneity, controls for target shareholder power, and other controls for firm and deal characteristics that have been shown to affect bondholders' wealth during takeovers.

Keywords: Bondholders, Corporate Governance, Mergers and Acquisitions

JEL Classification: G34