Inside Debt and Mergers and Acquisitions

2014 ◽  
Vol 49 (5-6) ◽  
pp. 1365-1401 ◽  
Author(s):  
Hieu V. Phan
Keyword(s):  
Mergers And Acquisitions ◽  
Stock Returns ◽  
Risk Taking ◽  
Chief Executive ◽  
Wealth Transfer ◽  
Inside Debt ◽  
Bond Returns ◽  
Abnormal Stock Returns ◽  
Corporate Risk

AbstractI empirically investigate the relation between chief executive officer (CEO) inside debt holdings and mergers and acquisitions (M&As), and find evidence consistent with the agency theory’s prediction of a negative relation between CEO inside debt holdings and corporate risk taking. Further analysis shows that CEO inside debt holdings are positively correlated with M&A announcement abnormal bond returns and long-term operating performance, but negatively correlated with M&A announcement abnormal stock returns. Finally, I find evidence that acquirers restructure the postmerger composition of CEO compensation that mirrors their capital structure in order to alleviate incentives for wealth transfer from shareholders to bondholders or vice versa.

Taxes and risk-taking behavior: evidence from mergers and acquisitions in the G7 nations

2018 ◽  
Vol 19 (3) ◽  
pp. 277-294
Author(s):  
Poonyawat Sreesing
Keyword(s):  
Mergers And Acquisitions ◽  
Option Pricing ◽  
Risk Taking ◽  
Investment Decisions ◽  
Tax Rates ◽  
Content Type ◽  
Asset Risk ◽  
Tax Effects ◽  
Corporate Risk

PurposeThis study aims to examine how corporate taxes affect corporate risk-taking decisions.Design/methodology/approachThis study examines corporate risk-taking by analyzing how a firm’s asset risk changes following an acquisition carried out by publicly listed companies in the G7 nations. To measure the asset risk of a firm, this study uses the option pricing framework in Merton (1974).FindingsConsistent with an implication of the Merton (1974) framework, the findings show that firms take more risk in their investment decisions when tax rates are high. Moreover, the tax effects wane for firms with a relatively large borrowing opportunity and this suggests that the risk-taking incentive from taxes is moderated by the reputation concern in the debt market, lending support to the Diamond (1989) reputation-building model. The empirical results also show that the tax-induced risk-taking incentive is restrained by creditor rights. Overall, the study reveals an important role of taxes in the structure of corporate investment decisions.Practical implicationsThe implications of this study can be beneficial to policymakers when considering the alteration of tax rates, as it will affect the riskiness of firm investment decisions.Originality/valueThis study provides a better understanding of the role of taxes on risk-taking and also contributes to the growing body of evidence supporting tax effects of risk-taking. The relationship between taxes and risk-taking has proven that the corporate taxation is one of the key factors that firms consider during their selection of risky investments. Unlike previous studies, this research is the first to investigate the change in asset risk, estimating by the option pricing framework, through studying a particular event: mergers and acquisitions.

Matched-Long Term Maturity Stock and Bond Returns in International Markets

2002 ◽  
Vol 46 (2) ◽  
pp. 45-53
Author(s):  
Nusret Cakici ◽  
Mitchell Kellman ◽  
Elli Kraizberg
Keyword(s):  
Stock Returns ◽  
Average Rate ◽  
International Markets ◽  
Strong Positive Correlation ◽  
Bond Yields ◽  
Cross Sectional ◽  
Inflation Rates ◽  
Bond Returns ◽  
Sectional Analysis

This paper examines the relationship between real stock returns and matched-maturity long-term bond yields for 16 countries. We find a strong positive correlation between real stock returns and corresponding matched-maturity long-term bond returns for every country in the sample. Our findings also indicate that the volatility of long term real stock returns is closely related to the volatility of long term real bond yields. Finally, an additional cross-sectional analysis indicates that the sensitivity of real stock returns to real bond yields in each country is negatively related to the average rate of inflation and the coefficient of variation of these inflation rates.

Corporate risk-taking with long-term, short-term and subordinate credit ratings

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Dror Parnes
Keyword(s):  
Risk Taking ◽  
Design Methodology ◽  
Credit Ratings ◽  
Short Term ◽  
Content Type ◽  
Interaction Terms ◽  
Domestic Credit ◽  
Lag Variables ◽  
Corporate Risk

PurposeThis study empirically examines, from the first quarter of 1981 until the fourth quarter of 2017, the relations across customary domestic issuer credit ratings (long-term, short-term and subordinate) and three popular corporate risk-taking measurements (the variability of operating profitability, net profitability, and research and development expenses).Design/methodology/approachThe author deploys categorical regressions and robustness tests with control variables, interaction terms, fixed effect variables, lag variables and delta variables.FindingsThe author documents that both short-term and subordinate domestic credit ratings are key determinants of the volatility of operating profitability. The author also identifies long-term credit ratings as secondary factors, yet they do affect broader corporate risk-taking behavioral features (along all three measurements). Furthermore, the author finds that the higher (lower) the credit ratings assigned, i.e. the superior (inferior) the credit quality externally judged, the more (less) overall risk firms tend to undertake.Originality/valueIt is the first research to examine both the inclusive influence and the granular effects of credit ratings on corporate risk-taking (CRT) behavior. It is also the only enquiry to inspect the specific relationships along three types of domestic issuer credit ratings: long-term, short-term and subordinate ratings.

Board independence and the variability of firm performance: Evidence from an exogenous regulatory shock

2017 ◽  
Vol 43 (1) ◽  
pp. 3-26 ◽  
Author(s):  
Ron Bird ◽  
Peng Huang ◽  
Yue Lu
Keyword(s):  
Firm Performance ◽  
Stock Returns ◽  
Risk Taking ◽  
Causal Relation ◽  
Capital Expenditures ◽  
Analyst Forecast ◽  
Board Independence ◽  
Exogenous Shock ◽  
Accounting Accruals ◽  
Corporate Risk

We use the 2003 NYSE and NASDAQ listing rules for board independence as an exogenous shock to estimate the causal relation between board independence and the variability of firm performance. Using a difference-in-difference approach, we find that non-compliant firms without a majority of independent directors observe a larger decrease in the variability of firm performance than compliant firms. In particular, board independence is negatively associated with the variability of (1) monthly stock returns, (2) ROA, (3) Tobin’s Q, (4) analyst forecast inaccuracy, (5) accounting accruals, (6) extraordinary items, (7) capital expenditures, (8) cash holdings and (9) the frequency of acquisition activities. We conclude that increased board independence weakens the CEO’s power over the board and restrains corporate risk-taking; thus, decisions made by firms with more independent boards are less extreme, resulting in less variability of firm performance.

scholarly journals Acquisitions of Financially Constrained Targets

2019 ◽  
pp. 1-10
Author(s):  
Maslinawati Mohamad ◽  
Surendranath Rakesh Jory ◽  
Nnamdi Madichie
Keyword(s):  
United States ◽  
Mergers And Acquisitions ◽  
Stock Returns ◽  
Abnormal Returns ◽  
The United States ◽  
Target Firm ◽  
Wealth Transfer ◽  
Stock Market Reaction ◽  
Cumulative Abnormal Returns ◽  
Acquisition Announcements

We examine the extent to which bidders’ stock returns at acquisition announcements reflect the financing needs of the target firm. Using a sample of the United States mergers and acquisitions of a period starts in 1985 and ends in 2012, we find that bidders of financially constrained targets pay lower acquisition premiums and earn higher announcement period cumulative abnormal returns than bidders of unconstrained targets. The lower premium and positive stock market reaction are both sources of value for bidders’ shareholders. Our results contrast the findings of the literature that document an insignificant wealth transfer to bidder shareholders.

scholarly journals Performance of Kenyan Listed Companies Pre and Post Chief Executive Officer Dismissal, Retirement and Resignation Events

2019 ◽  
Vol 14 (2) ◽  
pp. 180
Author(s):  
James N. Ndegwa
Keyword(s):  
Stock Returns ◽  
Significant Influence ◽  
Abnormal Returns ◽  
Chief Executive ◽  
Market Model ◽  
Return On Assets ◽  
Listed Firms ◽  
Paired Samples ◽  
Significant Difference ◽  
Abnormal Stock Returns

In the decade between years 2001 – 2011 Kenya experienced change of CEOs of listed firms through dismissal, resignation and retirement which created a need to establish whether CEO departure events had a significant influence on stock returns and profitability of the affected firms. In this research 9 CEO departure events 3 dismissal, 3 retirement and 3 resignation events were analyzed. Abnormal stock returns were computed by employing the market model and profitability of the affected listed firms was measured by employing return on assets (ROA). Paired samples t-test was employed to examine whether there was a significant difference in the abnormal returns and profitability (ROA) during pre and post CEO departure period. The findings indicated that there was no significant difference in abnormal stock returns and profitability in the pre and post CEO departure events. The findings implied that NSE investors were not excited by change of CEOs and that the NSE is semi strong form efficient.

Do bondholders receive benefits from bank interventions?

2018 ◽  
Vol 17 (2) ◽  
pp. 177-197
Author(s):  
Yili Lian
Keyword(s):  
Design Methodology ◽  
Chief Executive ◽  
Short Term ◽  
Content Type ◽  
Bond Performance ◽  
Bond Returns ◽  
Research Questions ◽  
The Difference ◽  
Covenant Violations

Purpose The purpose of this study is to examine the effect of bank interventions on bond performance in relation to loan covenant violations. Design/methodology/approach This paper tests the following questions: do bondholders receive benefits from bank interventions? Is bond performance related to the probability of bank interventions? Is the turnover of a chief executive officer (CEO) associated with bank interventions and bond performance? Abnormal bond returns, the difference between bond returns and matched bond index returns are used to measure bond performance. An estimated outstanding loan balance is used to measure the probability of bank interventions. CEO turnover is identified from proxy statements and categorized into forced and voluntary CEO turnovers. Event studies and regression analysis were used to answer the above research questions. Findings This paper finds that both short-term and long-term bond returns increase after covenant violations, bond performance is positively related to the probability of bank interventions, forced CEO turnovers are positively associated with the probability of bank interventions and firms with forced CEO turnovers tend to have superior bond performance. Originality/value This paper is the first to explore the relation between bank interventions and bond performance.

CEO Turnovers and Disruptions in Customer–Supplier Relationships

2017 ◽  
Vol 52 (6) ◽  
pp. 2565-2610 ◽  
Author(s):  
Vincent J. Intintoli ◽  
Matthew Serfling ◽  
Sarah Shaikh
Keyword(s):  
Financial Performance ◽  
Stock Returns ◽  
Chief Executive Officer ◽  
Chief Executive ◽  
Ceo Turnover ◽  
Supplier Relationships ◽  
Abnormal Stock Returns

Events that disrupt customer–supplier relationships pose a source of risk for suppliers that depend on a customer for a large portion of their revenues. We identify the replacement of a customer’s chief executive officer (CEO) as a disruptive event that results in suppliers losing substantial sales. These losses are greater when an incumbent customer CEO is more likely to be entrenched and stem largely from the successor divesting assets. Finally, we document that losses in sales following a customer CEO turnover lead to declines in a supplier’s financial performance and that suppliers experience negative abnormal stock returns to announcements of customer CEO departures.

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