An Empirical Analysis of the Stockholder-Bondholder Conflict in Corporate Spin-Offs
36 Pages Posted: 19 Oct 2005
Date Written: July 14, 2005
Spin-off announcements affect bondholders in two possible ways. Bondholders may profit from the increase in the total firm value that is caused by a spin-off. On the other hand, they may also suffer from a wealth transfer from bondholders to shareholders, because they loose part of the coinsurance effect that occurs in diversified firms. This problem is studied by analyzing daily stock and bond abnormal returns around spin-off announcements. Over a three-day event window, we find statistically significant abnormal returns of 3.07% for shareholders and 0.11% for bondholders. The latter result contrasts a finding by Maxwell and Rao (2003) who use monthly bond returns. Both stock and bond abnormal returns are higher for firms with higher pre-spin-off leverage and lower interest and dividend payouts. Focus-increasing spin-offs are associated with higher abnormal returns for shareholders, but not for bondholders. Overall, we find that the firm value increase compensates for the wealth transfer effect and that bondholders' wealth is not reduced as a result of spin-off.
Keywords: Spin-offs, divestitures, wealth transfer
JEL Classification: G34
Suggested Citation: Suggested Citation