An Empirical Analysis of the Stockholder-Bondholder Conflict in Corporate Spin-Offs

36 Pages Posted: 19 Oct 2005

See all articles by Chris Veld

Chris Veld

Monash University

Yulia V. Veld-Merkoulova

Monash University - Department of Finance; Financial Research Network (FIRN)

Date Written: July 14, 2005

Abstract

Spin-off announcements affect bondholders in two possible ways. Bondholders may profit from the increase in the total firm value that is caused by a spin-off. On the other hand, they may also suffer from a wealth transfer from bondholders to shareholders, because they loose part of the coinsurance effect that occurs in diversified firms. This problem is studied by analyzing daily stock and bond abnormal returns around spin-off announcements. Over a three-day event window, we find statistically significant abnormal returns of 3.07% for shareholders and 0.11% for bondholders. The latter result contrasts a finding by Maxwell and Rao (2003) who use monthly bond returns. Both stock and bond abnormal returns are higher for firms with higher pre-spin-off leverage and lower interest and dividend payouts. Focus-increasing spin-offs are associated with higher abnormal returns for shareholders, but not for bondholders. Overall, we find that the firm value increase compensates for the wealth transfer effect and that bondholders' wealth is not reduced as a result of spin-off.

Keywords: Spin-offs, divestitures, wealth transfer

JEL Classification: G34

Suggested Citation

Veld, Chris and Veld-Merkoulova, Yulia V., An Empirical Analysis of the Stockholder-Bondholder Conflict in Corporate Spin-Offs (July 14, 2005). Available at SSRN: https://ssrn.com/abstract=821604 or http://dx.doi.org/10.2139/ssrn.821604

Chris Veld (Contact Author)

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

Yulia V. Veld-Merkoulova

Monash University - Department of Finance ( email )

Building H
Caulfield, Victoria 3145
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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