Takeover Risk and the Correlation Between Stocks and Bonds

32 Pages Posted: 28 Feb 2007 Last revised: 9 Dec 2009

See all articles by Karan Bhanot

Karan Bhanot

University of Texas at San Antonio - Department of Finance

Sattar Mansi

Virginia Polytechnic Institute & State University

John K. Wald

University of Texas at San Antonio

Date Written: April 16, 2009

Abstract

Existing research suggests that, for a given firm, stock returns and changes in bond spreads are negatively related. In this paper, we show how takeover risk influences this relation. Based on a large sample of data covering the period from 1980 to 2000, we find that high-rated firms which are likely to be taken over have a more positive correlation between stock returns and bond spread changes, while target firms with a poison put or an indebtedness covenant have a more negative correlation. Overall, our findings have implications for the pricing and hedging of bonds and default risk based financial products such as credit default swaps.

Keywords: Stock-bond correlation, takeover probability, debt covenants

JEL Classification: G12, G34

Suggested Citation

Bhanot, Karan and Mansi, Sattar and Wald, John K., Takeover Risk and the Correlation Between Stocks and Bonds (April 16, 2009). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=965852 or http://dx.doi.org/10.2139/ssrn.965852

Karan Bhanot

University of Texas at San Antonio - Department of Finance ( email )

San Antonio, TX 78249
United States
210-458-7429 (Phone)
210-458-5837 (Fax)

Sattar Mansi

Virginia Polytechnic Institute & State University ( email )

John K. Wald (Contact Author)

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)

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