Debt Boundaries Matter: Does Subsidiary Debt Expropriate Wealth from the Bondholders?

Abstract

I investigate the effect of subsidiary bond issuance on the bond- and stock- value of parent firms. I document negative bond returns of 35 bps on the parent outstanding debt, in the week of the subsidiary bond issuance. At the same time, parent companies have positive abnormal stock returns of 3\% at the time of stock repurchases if they issued subsidiary debt in the last twelve months. The results are consistent with the subsidiary debt transferring wealth from bondholders to shareholders of the parent company.

Keywords: subsidiary debt, wealth transfers, stock repurchases, bond returns.

JEL Classification: G30, G32, L22