Abstract
I study the bond price reaction of a merged firms peers, in order to better understand how the market responds to a restructuring. I 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. Consistent with this hypothesis, I show that price reactions are stronger for firms that have a higher unconditional probability of being acquired ex-ante. Furthermore I show that following an initial merger, when the signal about a potentially upcoming wave should be the strongest, the peer bond returns are the highest. In addition, I document that, cross-sectionally, the abnormal returns I observe from peer bondholders are concentrated among firms that have the highest expected coinsurance benefit from a potential acquisition. I show that this is the case for bondholders between firms and within firms.
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
In this paper we examine the effect of a merger, or an acquisition, on the merging firms’ peers
Through the lens of the peers’ bond prices we provide evidence that a merger leads to an increase in the average acquisition probability for its peer firms within industry; or at the very least we argue that our result indicate that the market participants believe this is the case
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. Under this conjecture—which is referred to as the Acquisition Probability Hypothesis (APH) (Song and Walkling 2000) , we expect that peer firm stakeholders will have a positive, and symmetric, reaction to an acquisition in their industry as long as they stand to benefit from a potential acquisition. If the probability of being acquired increases we expect a positive reaction from peer equity holders on average because equity holders stand to benefit from a price premium paid for shares in any potential acquisition
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