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- Title
Do Spin-offs Expropriate Wealth from Bondholders?
- Authors
MAXWELL, WILLIAM F.; RAO, RAMESH P.
- Abstract
A wealth transfer from bondholders to stockholders is one of several hypotheses used to explain stockholder gains on the announcement of a spin-off. However, previous empirical research has not found systematic evidence supporting the wealth expropriation hypothesis. Using a larger sample with comprehensive bond data, we find evidence consistent with wealth expropriation. Bondholders, on average, suffer a significant negative abnormal return during the month of the spin-off announcement. However, even accounting for the loss to the bondholders, the aggregate value of the publicly traded debt and equity increases on a spin-off announcement, suggesting that the wealth expropriation hypothesis is not a complete explanation of the stockholder gains. In explaining the magnitude of the losses to bondholders, we find they are a function of the loss in collateral in the spun-off subsidiary and the level of financial risk of the parent firm. Consistent with a loss to bondholders, firms are more likely to have their credit rating downgraded than upgraded after a spin-off. Additionally, consistent with the wealth transfer hypothesis, losses to bondholders tend to be more severe, the larger the gains to shareholders.
- Subjects
CORPORATE divestiture; STOCKHOLDERS; BONDHOLDERS; BUSINESS finance; SUBSIDIARY corporations; BOND transfer; FINANCIAL risk; CREDIT ratings; STOCKHOLDER wealth; RESOURCE allocation; CORPORATE reorganizations; FINANCIAL management; ECONOMICS
- Publication
Journal of Finance (Wiley-Blackwell), 2003, Vol 58, Issue 5, p2087
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/1540-6261.00598