Does Corporate Coinsurance Enhance Shareholder Value?
45 Pages Posted: 19 Mar 2010
Date Written: March 16, 2010
This paper tests Leland's (2007) theoretical prediction that depending on specific merger conditions, corporate coinsurance can generate either synergistic gains accruing to both creditors and equityholders or a wealth transfer from stockholders to bondholders. We observe that in merger deals of firms with low cash-flow correlation, synergistic gains enhance shareholder as well as bondholder wealth. The difference in their cash-flow volatilities is positively related to shareholder return around merger announcements and to changes in bond rating of acquiring firms two months after the merger. On the other hand, in mergers of firms with high cash-flow correlation, the result shows a wealth redistribution, where shareholder wealth, and not bondholder wealth, is reduced. Under this condition, the increase in the same cash-flow volatility difference of merging firms negatively affects the combined stockholders' return, but not the bond rating of acquiring firms.
Keywords: Financial synergy, coinsurance, debt, capital structure, mergers and acquisitions
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