Second‐stage events and bondholder wealth

Abstract

PurposeThe purpose of this paper is to provide a comprehensive initial evaluation of the wealth transfer hypothesis as applied to the second‐stage events and announcements that follow carve‐outs during the period from 1983 to 2004.Design/methodology/approachUsing daily security prices, such combinations are shown to have multi‐faceted wealth transfers and wealth creation.FindingsIn contrast with the wealth losses found in previous studies, wealth increases are observed for parent stockholders and bondholders in the spin‐off announcement and event phases for combination carve‐outs and spin‐offs. Also, the spin‐off is the most prevalent second divestiture choice for parents with traded debt.Originality/valueThis study makes several contributions to the literature. First, in contrast with recent wealth transfer studies that use monthly bond returns, daily stock and bond returns are used to examine the wealth effect for parent stockholders and bondholders during the announcement and ex‐dates of second‐stage events. Second, in contrast with previous studies that found a wealth transfer from bondholders to stockholders in the spin‐off phase, statistically significant wealth retention was observed for bondholders and for stockholders at spin‐off and other second event announcements. Third, the results reflect that increased collateral from the carve‐out phase lessens the potential for bondholder wealth loss in the spin‐off phase.