Determinants of bondholder wealth following corporate takeovers (1980-1988)

Abstract

Abnormal returns earned by nonconve rtible bondholders following corporate takeovers are related inversely to issuer default risk. High quality bonds (rated A or above) tend to earn negative abnormal returns, and low quality bonds (rated BBB or below) tend to earn positive abnormal returns. A significant amount of variation also is observed in the returns earned by target and acquiring firm bondholders. Target firm bond returns are related inversely to issuer default risk and changes in issuer leverage. In contrast, acquiring firm bondholders earn higher returns following unrelated mergers and acquisitions that increase the firm's leverage ratio. Finally, this study examines the importance of indenture covenants. While high quality senior bonds with few restrictive covenants often lose following corporate takeovers, subordinated bondholders generally gain.

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