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- Title
DISCUSSION.
- Authors
VAN HORNE, JAMES C.
- Abstract
The Kim and McConnell paper represents a stimulating and creative endeavor to learn more about the valuation of corporate debt instruments--in this case, under the circumstances of a merger. It, along with certain other recent work, represent significant advances in an area that largely has been passed over in the theoretical and empirical development of the field. I commend the authors on their choice of subject matter and on their contribution. While specific criticisms are in order, on balance I found the paper to be very worthwhile. The authors examine the "financial synergism" or "debt coinsurance" proposition advanced by Lewellen some six years ago at these meetings, as modified by Higgins and Schall in a recent Journal of Finance article. In essence, the argument is that by merging the debt capacity of the combined entity rises relative to the sum of the debt capacities of the individual companies. The fused cash flows are less risky; and lenders are unable to obtain this risk reduction on their own. Hence, the value of the debt rises under perfect market assumptions and equity values fall because of the value additive principle. As an aside, it has struck me that implicitly implied in this argument is that a degree of segmentation exists between debt and equity markets. That is, there is not the ability to invest in both the debt and equity instruments of a company.
- Subjects
CORPORATE debt; MERGERS &; acquisitions; TRANSACTION costs; CORPORATE finance; MCCONNELL, John J.; KIM, E. Han; COINSURANCE; CORPORATE debt financing; DEBT cancellation; CORPORATE bonds
- Publication
Journal of Finance (Wiley-Blackwell), 1977, Vol 32, Issue 2, p368
- ISSN
0022-1082
- Publication type
Article
- DOI
10.2307/2326769