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

University of Iowa Working Paper

51 Pages Posted: 15 Apr 2002

See all articles by Matthew T. Billett

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

Dolly King

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

David C. Mauer

affiliation not provided to SSRN

Date Written: April 2002

Abstract

We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders for a sample of 940 offers involving 3,901 bonds during the period 1979-1997. We find strong evidence of a coinsurance effect for target bondholders, and we are able to trace target bondholder gains to a wealth-redistribution from target stockholders. During the announcement period, average acquirer excess bond returns are significantly negative while average target excess bond returns are significantly positive. For target bonds, the average excess return to below investment grade bonds is over 4%. Target bondholder returns are significantly larger when the merger reduces asset risk, when the target bond rating is below the acquirer bond rating, when the pre-merger leverage ratio of the target is greater than the pre-merger leverage ratio of the acquirer, and when the average target bond maturity is shorter than the average acquirer bond maturity. In addition, both target and acquirer excess bond returns are significantly smaller if the offer is hostile and are significantly larger in the 1990s, an era marked by increased bondholder event risk protection. Estimation of simultaneous equations models reveals that target stockholder dollar gains are significantly decreasing in target bondholder dollar gains, a result consistent with the view that target bondholder gains in takeovers come at the expense of target stockholders.

Keywords: Mergers, Acquisitions, Takeovers, Corporate Control, Bonds, Wealth Effects

JEL Classification: G32, G34

Suggested Citation

Billett, Matthew T. and King, Dolly and Mauer, David C., Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s (April 2002). University of Iowa Working Paper, Available at SSRN: https://ssrn.com/abstract=306760 or http://dx.doi.org/10.2139/ssrn.306760

Matthew T. Billett (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

Dolly King

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States
414-229-4369 (Phone)

David C. Mauer

affiliation not provided to SSRN

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