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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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4. Wealth Effects of Corporate Bond Reopenings


The cost of capital and its implication for corporate finance is one of the crucial challenges for a company’s management. Thus, executives are frequently confronted with the question how to finance investments, through equity, debt, or a combination of both. Due to its importance, this subject has also found its way into the academic world and lead to outstanding papers like the seminal work by Modigliani and Miller (1958) about the irrelevance of a firm’s capital structure. However, since the assumptions in a Modigliani and Miller world about capital markets are rather strict and do not apply to the real world in general, various researchers devoted themselves to empirically investigate the impact of financing decisions on firm value. Several hypotheses were developed and tested like the Pecking Order Theory (Myers & Majluf, 1984), the Free Cash Flow Theory (Jensen, 1986), or the Market Timing Hypothesis (Baker & Wurgler, 2002). However, the greater part of this research investigates changes in a company’s equity, demonstrating a clear dominance of equity securities over debt securities.46 In the past, the issuance of bonds did not possess the same appeal for researchers as SEO did, for instance. The result of this disregard is that empirical evidence on the impact of debt offerings on firm value is scarce and inconclusive. Present research however, begins to discover the potential of this subject and reveals new and interesting challenges that need to be investigated. This thesis is one of them and deals with a purely debt...

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