Does Corporate Coinsurance Enhance Shareholder Value?

45 Pages Posted: 19 Mar 2010

See all articles by Lilian Ng

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Hyeongsop Shim

Gachon University

Valeriy Sibilkov

University of Wisconsin - Milwaukee - Department of Finance

Date Written: March 16, 2010

Abstract

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

Suggested Citation

Ng, Lilian and Shim, Hyeongsop and Sibilkov, Valeriy, Does Corporate Coinsurance Enhance Shareholder Value? (March 16, 2010). Available at SSRN: https://ssrn.com/abstract=1572960 or http://dx.doi.org/10.2139/ssrn.1572960

Lilian Ng

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Hyeongsop Shim

Gachon University ( email )

1342 Seongnamdaero, Sujeong-gu
Gachon-gwan #707
Seongnam-si, 13120
Korea, Republic of (South Korea)
82-31-750-5530 (Phone)

HOME PAGE: http://orcid.org/0000-0001-8722-4610

Valeriy Sibilkov (Contact Author)

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

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