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

Abstract

We analyze M&A announcements and focus on the potential 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 small with rather illiquid bonds and show maturity concentrations. M&A transactions can significantly change the debt maturity structure and liquidity risk of these bonds. We find the size of the average announcement return of target bonds is 40 bp and increases by around 50% for target firms with a low debt dispersion and illiquid bonds. Furthermore, we document a permanent increase of 15% in the liquidity of these bonds. We find only small negative returns for acquirer bonds, which can be explained by the difference in size. Overall, we provide important new insights concerning bond price effects around M&A announcements.

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

JEL Classification: G10, G14, G32, G34