The Effect of Credit, Liquidity and Rollover Risk on Bondholder Wealth in Mergers and Acquisitions

43 Pages Posted: 8 Jun 2021 Last revised: 11 May 2023

See all articles by Rainer Jankowitsch

Rainer Jankowitsch

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Florian Pauer

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics

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Date Written: June 4, 2021

Abstract

We analyze M&A announcements and focus on the impact of these deals on bond prices in the US corporate bond market. In particular, we investigate the effect of changes in credit, liquidity and rollover risk. This is important, as especially target firms are often smaller and riskier with rather illiquid bonds and show maturity concentrations. M&A transactions can significantly change the debt maturity structure and risk characteristics of these bonds. On average, we find announcement returns of around 0.92% for target bonds. However, this effect increases to 3.19% for target firms with high credit risk, low debt dispersion and illiquid bonds. We find much smaller negative returns for acquirer bonds, which can be explained by the difference in size. In addition, we show that the risk characteristics of bonds change in the year after the announcement in accordance with investors' expectations.

Keywords: bond price, acquisition, merger, event study, co-insurance, rollover risk

JEL Classification: G10, G14, G32, G34

Suggested Citation

Jankowitsch, Rainer and Pauer, Florian, The Effect of Credit, Liquidity and Rollover Risk on Bondholder Wealth in Mergers and Acquisitions (June 4, 2021). Available at SSRN: https://ssrn.com/abstract=3859921 or http://dx.doi.org/10.2139/ssrn.3859921

Rainer Jankowitsch

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
Vienna, Vienna AT1020
Austria
+43 1 31 336 4340 (Phone)
+43 1 310 0580 (Fax)

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Florian Pauer (Contact Author)

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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