Poison Put Bonds: An Analysis of Their Economic Role

This article examines the effect of issuing debt with and without “poison put” covenants on outstanding debt and equity claims for the period 1988 to 1989. The analysis shows that “poison put” covenants affect stockholders negatively and outstanding bondholders positively, while debt issued without such covenants has no effect. The study also finds a negative relationship between stock and bond returns for firms issuing poison put debt. These results are consistent with a “mutual interest hypothesis,” which suggests that the issuance of poison put debt protects managers and, coincidentally, bondholders, at the expense of stockholders.     

THE IMPACT OF SALE-LEASEBACKS TRANSACTIONS ON BONDHOLDER AND SHAREHOLDER WEALTH

Prior research has shown that a sale and leaseback transaction (SLBT) results in positive average abnormal returns to the lessee's common stockholders. Researchers have conjectured that this could be due to SLBT tax benefits or due to a wealth transfer from bondholders (since after the SLBT it is possible that fewer assets remain as collateral). This study shows that bondholders do not lose in SLBT's and confirms previous results showing that stockholders gain from sale leaseback transactions. The results are consistent with the position that bondholders write provisions to protect their rights to the underlying assets, resulting in no wealth transfer from bondholders to stockholders when the firm sells off assets and leases them back.     

Wealth transfer,signaling and leverage in M&A

Merger activity amplifies the conflict of interest between a bidder's different classes of security holders. This study examines how equity returns and credit default swap spreads are affected by acquisition-driven changes in firm leverage. We develop an improved proxy for predicted leverage changes which includes transaction financing and find it has a positive relationship with both equity returns and credit spreads. Using data for North American firms that made acquisition announcements between 2008 and 2014, we find that in leverage increasing mergers, bidding firm shareholders gain while bondholders lose. While these results are consistent with the wealth transfer literature we show that the gains to bidders' shareholders and losses to bidders' bondholders are caused by the change in leverage, not the form of payment or its signaling effect as is commonly documented.     

Risk and return: The case of merging firms

This study examines the market for acquisitions and the impact of mergers on the returns to the stockholders of the constituent firms. While employing the two-factor market model as recently developed and applied by Black-Jensen-Scholes and Fama-MacBeth, this study also considers changes in risk in analyzing the impact of mergers on stock prices. The results of the study are consistent with the hypothesis that the market for acquisitions is perfectly competitive and with the hypothesis that information regarding mergers is efficiently incorporated in the stock prices. Stockholders of acquiring firms seem to earn normal returns from mergers as from other investment-production activities with commensurate risk levels. Stockholders of acquired firms earn abnormal returns of approximately 14%, on the average, in the seven months preceding the merger.     

AN EXAMINATION OF MERGER SYNERGISM

The empirical research discussed in this paper measures the synergistic effects of mergers on the stockholders of the acquiring and acquired firms. Synergism is defined as the incremental wealth to the shareholders of both merging firms due to the merger—net of any potential gains achievable through investors' personal diversification over the common stocks of the merging firms. Three types of mergers are identified and studied—nonconglomerate, conglomerate with increasing financial leverage, and conglomerate with decreasing financial leverage. The results indicate that these types of mergers are affected differently by the combination. Moreover, the evidence suggests operational and/or financial synergism.     

WHO GAINS FROM CORPORATE ASSET SALES?

This study documents that sell-offs, on average, are firm value enhancing, as both stockholders and bondholders gain from such transactions. Further, it reveals that sell-offs can be wealth redistributing, value destroying, or value enhancing depending on the way the sale proceeds are distributed and the motive underlying the sell-off. The wealth effects on stockholders and bondholders are not always symmetrical. Our results suggest that benefits from the sale of assets that do not strategically fit the firm's core business accrue primarily to stockholders, while benefits from distress-related sell-offs accrue to bondholders. Sell-offs to thwart takeovers destroy firm value. We document that a significant proportion of sell-offs results in wealth transfers between securityholders. Restrictive dividend covenants play an important role in protecting bondholders from wealth expropriation. Our analysis suggests that the relative size of the asset sale, the uses of the sale proceeds, and the degree of protection afforded bondholders via a dividend restriction may be relevant in explaining the direction of wealth transfer.     

Corporate Combinations and Common Stock Returns: The Case of Joint Ventures

The gain to stockholders from mergers is well documented. However, there is little evidence as to whether the source of the gain is due to synergy or management displacement. Merger is just one of an almost limitless variety of ways in which firms combine resources to accomplish some objective. A joint venture is another. In addition to being of interest as an independent phenomenon, because the original managements of the parent firms remain intact under a joint venture, investigation of wealth gains from joint ventures provides an opportunity to isolate the management displacement hypothesis from the synergy hypothesis as the source of gains in corporate combinations. Our results are 1) there are significant wealth gains from joint ventures, 2) the smaller partner earns a larger excess rate of return while the dollar gains are more equally divided, and 3) the gains, scaled by resources committed, yield “premiums” similar to those in mergers. We are inclined to interpret our results as supportive of the synergy hypothesis as the source of gain from corporate combinations.     

MERGER ACTIVITY AND MANAGERIAL COMPENSATION

A theoretical monopolistic economy is developed to explain relationships between merger activity and managerial compensation packages. In this economy, managers are assigned to and compensated by firms based on models established in “n” person cooperative game theory. Compensation packages offered to managers of potential acquiring firms are studied with respect to their impact on managers' willingness to initiate profitable merger bids. The model explains why overall merger returns decrease as the size of the target firm relative to the bidding firm increases. Model results are consistent with numerous other empirical findings regarding merger profit distributions.     

The timing and terms of mergers motivated by economies of scale

This paper analyzes the timing of mergers motivated by economies of scale. We show that firms have an incentive to merge in periods of economic expansion. Relaxing the assumption that firms are price takers, we find that market power strengthens the firms’ incentive to merge and speeds up merger activity. Finally, comparing mergers with hostile takeovers we show that the way merger synergies are divided not only influences the acquirer's and the acquiree's returns from merging, but also the timing of the restructuring.     

The Post-Merger Performance of Acquiring Firms: A Re-examination of an Anomaly

The existing literature on the post-merger performance of acquiring firms is divided. We re-examine this issue, using a nearly exhaustive sample of mergers between NYSE acquirers and NYSE/AMEX targets. We find that stockholders of acquiring firms suffer a statistically significant loss of about 10% over the five-year post-merger period, a result robust to various specifications. Our evidence suggests that neither the firm size effect nor beta estimation problems are the cause of the negative post-merger returns. We examine whether this result is caused by a slow adjustment of the market to the merger event. Our results do not seem consistent with this hypothesis.     

Distributive inefficiency in horizontal mergers: Evidence from wealth transfers between merging firms and their customers

The ultimate goal of antitrust enforcement is to maximize the surplus consumers enjoy by enhancing production efficiency and eliminating market power. Previous literature focuses on the average net wealth effects on merging firms and their stakeholder firms and reports evidence of efficiency gains while no evidence of market power in horizontal mergers. In this paper, we examine how efficiency gains distribute between the merging firms and their customer firms. We find a significant negative relation between the combined abnormal returns on the merging firms and those on their customer firms, demonstrating a wealth transfer effect. Such a negative relation is more pronounced when market power is likely to be more intensive. On average, the merging firms gain, and their customers do not lose. Our results suggest that market power allows merging firms to withhold merger gains that would have been passed to the downstream under perfect competition and prevents customers from enjoying the whole consumer surplus. Distributive inefficiency exists in horizontal mergers.     

Bondholder and stockholder reactions to discretionary accounting changes

This study examines bondholder and stockholder reactions to discretionary accounting changes that increase reported income to determine whether the changes are associated with a wealth transfer from bondholders to stockholders or with a loss in the wealth of both groups of investors. The evidence supports the wealth loss hypothesis. Negative relative returns to bondholders and stockholders appear to be related to the accounting changes after controlling the effects of earnings. The study examines earnings, management compensation, and debt covenant variables as possible motives for the accounting changes. It finds systematic differences between the change companies and matched nonchange companies on all three variables. The profile data are consistent with a setting in which managers use accounting changes to boost reported income and their own compensation during poor years.     

Powerful bidders and value creation in M&As

This paper explores the role of bargaining ability in corporate mergers and acquisitions (M&As) by focusing on acquiring firms with ex-ante market power—powerful bidders. Drawing from a bargaining power theoretical stance, we argue that powerful bidders create value from M&A activity by paying comparatively lower premiums. We test our empirical proposition using a sample of 9327 M&A deals announced between 2004 and 2016 by bidders across 30 countries. Contrary to the stylized fact that bidders do not gain from M&A activity, we uncover evidence suggesting that powerful bidders pay lower bid premiums and, consequently, earn positive (and relatively higher) cumulative announcement returns (CARs) from M&A deals. On average, the mean returns to powerful bidders (1.3%) are at least twice those of their less powerful counterparts (0.6%). We identify “low financial constraints” as a potential channel through which higher bidder power translates to improved deal performance. Overall, our results provide new evidence on how industry dynamics, notably bargaining power, influences M&A outcomes.     

Liquidity and Returns to Target Shareholders in the Market for Corporate Control: Evidence from the US Markets

In this paper we analyze how stock market liquidity affects the abnormal return to target firms in mergers and tender offers. We predict that target firms with poorer stock market liquidity receive larger announcement day abnormal returns based on the following considerations. First, target firms with poorer stock market liquidity receive greater liquidity improvements after a merger or tender offer. Second, deals that involve less liquid targets are less anticipated and/or more likely to be completed. Third, less liquid stocks have more diverse reservation prices across shareholders and thus require a higher takeover return. Consistent with these expectations, we show that abnormal returns to target firms’ shareholders are significantly and positively related to the difference in liquidity (measured by the bid‐ask spread) between acquirers and targets as well as the magnitude of target firms’ liquidity improvement.     

The Impact of Bank Consolidation on Commercial Borrower Welfare

We estimate the impact of bank merger announcements on borrowers' stock prices for publicly traded Norwegian firms. Borrowers of target banks lose about 0.8% in equity value, while borrowers of acquiring banks earn positive abnormal returns, suggesting that borrower welfare is influenced by a strategic focus favoring acquiring borrowers. Bank mergers lead to higher relationship exit rates among borrowers of target banks. Larger merger‐induced increases in relationship termination rates are associated with less negative abnormal returns, suggesting that firms with low switching costs switch banks, while similar firms with high switching costs are locked into their current relationship.     

Understanding partial mergers in Japan

Since the late 1990s, Japan has witnessed a substantial increase of partial mergers where two or more firms spin off whole operations in the same business and combine them into a joint venture (JV). This paper provides the first academic evidence on this phenomenon. I find that partial mergers normally occur as a response to negative economic shocks by firms that are larger and more diversified than firms in total mergers. An event study identifies positive and significant returns to partial merger announcements. Unlike total mergers whose value accrues mostly to the shareholders of small (acquired) firms, large and small firms in partial mergers receive comparable returns, which are particularly large to firms forming an equally owned JV. This study also finds that partial mergers are often ex post transformed, with equity sale between partners being the main source of change.     

Corporate social responsibility and stakeholder value maximization: Evidence from mergers

Using a large sample of mergers in the US, we examine whether corporate social responsibility (CSR) creates value for acquiring firms' shareholders. We find that compared with low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers' social performance is an important determinant of merger performance and the probability of its completion, and they support the stakeholder value maximization view of stakeholder theory.     

SHAREHOLDER RETURNS TO USA ACQUIRED FIRMS IN FOREIGN AND DOMESTIC ACQUISITIONS

This research employs the residual methodology to examine whether gains to shareholders exist through international diversification. Under the assump tion that bid premiums (abnormal returns) are a proxy for expected gains in a merger, the magnitude of abnormal returns to acquired f m s in foreign and domestic mergers is determined using the market model. Any significant difference is imputed to expected gains from international diversification. Results indicate that although differences appear to exist, these differences are insignificant when method of payment and merger type are considered.     

How Much Is Too Much: Are Merger Premiums Too High?

Is it too much to pay target firm shareholders a 50% premium on top of market price? Or is it too much to pay a 100% premium when pursuing mergers and acquisitions? How much is too much? In this paper, we examine how the extent of merger premiums paid impacts both the long‐run and announcement period stock returns of acquiring firms. We find no evidence that acquirers paying high premiums underperform those paying relatively low premiums in three years following mergers, and the result is robust after controlling for a variety of firm and deal characteristics. Short term cumulative abnormal returns are moreover positively correlated to the level of the premium paid by acquirers. Our evidence therefore suggests that high merger premiums paid are unlikely to be responsible for acquirers' long‐run post merger underperformance.     

Divestments and financial distress in leveraged buyouts

This paper investigates the wealth effects of 134 divestments by 41 firms that underwent leveraged buyouts in the 1980s. Stock in these companies is privately owned. Bond returns for publicly traded debt are used to measure the wealth effects of the divestment announcement. These divestments are, on average, not associated with significant wealth effects for the full sample. However, firms that experience financial distress have negative and significant abnormal returns associated with their divestments, while returns in non-event months are insignificant. In contrast, non-distressed firms gain when asset sales are announced. The losses suffered by bondholders in distressed sellers are large and significant when core assets are divested. Bondholders in these firms do not suffer significant losses when non-core assets are divested. Finally, abnormal bond returns are related to the structure of the firms' post-buyout debt. Returns are negatively related to the use of private debt in the capital structure and positively related to the use of subordinated debt.