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Analyzing Wealth Effects for Bondholders

New Insight on Major Corporate Events from the Debtholders’ Perspective


Daniel Maul

Despite the growing importance of funds through corporate bonds, most investigations on the short-term effects of certain events on firm value are only conducted for stocks. Thus, research provides an incomplete view on how firm value is truly affected. The author fills this gap and focuses his research on corporate debt. The first section of the book provides a comprehensive overview of existing methodologies to calculate abnormal bond returns. Subsequently, two frameworks are selected to investigate the importance of corporate debt when empirically assessing major corporate events: Synergy disclosure at M&A announcements and debt offerings through reopenings. Both provide evidence for the necessity to regard corporate debt to fully assess changes in firm value.
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3. Wealth Effects of Synergy disclosing M&A Announcements in the US Energy Sector


Prior research on wealth effects for share- and bondholders during M&A lead to diverging value implications for not only the respective party (i.e. target and acquirers), but also for the holding entity (i.e. share- or bondholder). On a theoretical level, bondholders, regardless of whether they are target or bidder bondholders, should experience a value creation due to the so-called co-insurance effect: as the cash flows of the merging entities are imperfectly correlated, the debt default risk is reduced, which leads to a value appreciation for bonds (Kim & McConnell, 1977). Along this reasoning, Galai and Masulis (1976) propose that during non-synergetic mergers this value creation is directly offset by the wealth loss of the shareholders. On the contrary, other researchers like Settle, Petry, and Hsia (1984) or Dennis and McConnell (1986) indicate that there may also exist a so-called synergy effect during which bondholders share emerging synergies with shareholders, thus both parties experience a value creation. This, however, requires M&A to result in synergies, which is yet not the case for all transactions. Occasionally, firms voluntarily communicate along with the M&A announcement a quantitative synergy forecast which is expected to result in diverging value consequences for bondholders.

Voluntary disclosure in general, according to Lang and Lundholm (1996), has proved to have important capital market consequences, thus it is expectable that these also affect bonds and have in particular value consequences if synergies are projected. According to the author’s best knowledge...

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