The Effect of Industry Restructuring on Peer Firms
45 Pages Posted: 10 Nov 2016 Last revised: 23 Jul 2018
Date Written: March 28, 2016
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: Suggested Citation