New Insight on Major Corporate Events from the Debtholders’ Perspective
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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