The Effect of Industry Restructuring on Peer Firms

45 Pages Posted: 10 Nov 2016 Last revised: 23 Jul 2018

See all articles by Alex Holcomb

Alex Holcomb

University of Texas at El Paso - College of Business Administration; University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: March 28, 2016

Abstract

I study the bond price reaction of a merged firms peers, in order to better understand how the market responds to a restructuring. I argue that a merger announcement may signal the possibility of a merger wave to the industry, and in doing so, increase the conditional probability that peer firms might themselves be acquired in the future. However, while peer firm equity holders expect a direct benefit from a potential acquisition---in the form of a price premium---peer firm bond holders can only expect an indirect benefit---in the form of a risk reduction through coinsurance. Consistent with these hypotheses, I show that price reactions are stronger for firms that have a higher unconditional probability of being acquired ex-ante. In addition, I document that, cross-sectionally, the abnormal returns I observe from peer bondholders are concentrated among firms that have the highest expected coinsurance benefit from a potential acquisition. In order to distinguish the coinsurance benefit as the explicit return driver, I show that abnormal bond returns within firm (between different bond issues) are also concentrated among issues that have the highest expected coinsurance benefit.

Keywords: Bond Prices, Equity Prices, Competition, Mergers, Acquisitions

JEL Classification: G12, G14, G32, G34

Suggested Citation

Holcomb, Alex, The Effect of Industry Restructuring on Peer Firms (March 28, 2016). Available at SSRN: https://ssrn.com/abstract=2866777 or http://dx.doi.org/10.2139/ssrn.2866777

Alex Holcomb (Contact Author)

University of Texas at El Paso - College of Business Administration ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
United States

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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