Abstract
We study the bond price reaction of a merged firms peers, in order to better understand how the market responds to a restructuring. We argue that a merger announcement may signal the possibility of a merger wave to the industry, and in doing so, increase the conditional probability that peer firms might themselves be acquired in the future. However, while peer firm equity holders expect a direct benefit from a potential acquisition—in the form of a price premium—peer firm bond holders can only expect an indirect benefit—in the form of a risk reduction. Consistent with these hypotheses, we show that price reactions are stronger for firms that have a higher unconditional probability of being acquired ex-ante. In addition, we document that, cross-sectionally, the abnormal returns we observe from peer bondholders are concentrated among firms that have the highest expected risk reduction benefit from a potential acquisition. In order to distinguish a potential reduction in risk as the explicit return driver, we show that abnormal bond returns within firm (between different bond issues) are also concentrated among issues that have the highest expected risk reduction benefit.
Highlights
Recent research on financial markets has documented the staggering degree to which firms are interconnected, and to which they react to their peers decisions.1 Recognition of this has led researchers to look beyond the firms that are engaged in a transaction, such as a merger, and investigate the impact such a transaction has on the web of firms connected to the transaction in some way
We find that following a merger announcement and in agreement with (Song and Walkling 2000), peer firm stock prices exhibit a positive cumulative abnormal return (CAR) in the [−7, 7] window12 of 0.60%, which is statistically significant at the 5% level
In this paper we examine the effect of a merger, or an acquisition, on the merging firms’ peers
Summary
Recent research on financial markets has documented the staggering degree to which firms are interconnected, and to which they react to their peers decisions. Recognition of this has led researchers to look beyond the firms that are engaged in a transaction, such as a merger, and investigate the impact such a transaction has on the web of firms connected to the transaction in some way. We argue that peer firm stakeholders view a contemporary acquisition as a signal about the possibility of subsequent consolidation within the industry This signal carries enough information for peer firm stakeholders to update their beliefs about potentially being acquired as part of a forthcoming wave. The literature demonstrates that acquisitions typically provide a direct benefit to target equity holders (as a price premium) and potentially provide an indirect benefit to target bondholders (if it reduces the risk of the firm). We expect that these reactions to an actual merger should extrapolate to help predict the reactions for peer firms that may experience a potential merger in the future
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
