Determinants of bondholder wealth effects in corporate restructurings: evidence from spin-offs as compared to mergers and acquistions
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This dissertation investigates the effects of mergers and acquisitions and spin-offs on the firm and its debtholders. This paper analyzes changes in the firm characteristics including capital structure, business risks, and operating performance. I develop a theoretical model that predicts the relationship between cross-sectional firm characteristics and the changes in wealth of the original bondholders (of the parent/acquirer firms) that have publicly traded outstanding nonconvertible debt at the time of a spin-off and merger/acquisition respectively. The empirical analysis shows wealth effects on the original bondholders of the parent/acquirer firm. Monthly bond returns are calculated relative to the announcement date for a sample of firms that have undertaken a spin-off or merger/acquisition. The results show a cross-sectional variation in the reaction to the announcement. The cross-sectional firm characteristics that determine the magnitude of these effects are identified. A parent firm’s pre-spin-off leverage, change in leverage, and change in operating efficiency as a result of the spin-off are important determinants of wealth distribution to bondholders in these corporate restructurings. The results of this study provide evidence that different value drivers, depending on the type of restructuring, determine bondholder wealth effects. In spin-offs, the leverage effect is the predominant determinant of bondholder wealth. In mergers and acquisitions, the change in business risks primarily influences the effect of the merger on bondholder wealth. Bondholders gain more in focus-increasing spin-offs and in focus-preserving (nonconglomerate) mergers.