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Block Share Acquisitions and Bondholder wealth effects

Jim Hsieh (George Mason) Dolly King (UNC Charlotte) NTU, 12/10/2010. Block Share Acquisitions and Bondholder wealth effects. Two Different Types of Block Share Acquisitions. Block Trades Blockholders purchase shares from other shareholders in the market. Private Placements

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Block Share Acquisitions and Bondholder wealth effects

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  1. Jim Hsieh (George Mason) Dolly King (UNC Charlotte) NTU, 12/10/2010 Block Share Acquisitions and Bondholder wealth effects

  2. Two Different Types of Block Share Acquisitions • Block Trades • Blockholders purchase shares from other shareholders in the market. • Private Placements • Blockholders purchase block shares directly from the target firm. NTU 2010 2

  3. Why This Study? • It is documented extensively in the literature that blockholders play an important and positiverole in corporate policy and performance. • Theoretical papers: • Threat of corporate control: Shleifer and Vishny (1986), Grossman and Hart (1988) • Monitoring/intervention: Admati, Pfleiderer, and Zechner (1994), Maug (1998) • Trading: Admati and Pfleiderer (2009), Edmans (2009) NTU 2010 3

  4. Why This Study? • Empirical evidence: • Block share acquisitions, on average, are associated with positive changes in shareholder value. • They are also associated with significant improvements in firm performance. • However, we still do not know: • The impact of those acquisitions on holders of the target firm’s debt securities. • The full consequences of those acquisitions on the wealth of different claimholders. NTU 2010 4

  5. Objective of This Study • Examine the effects of block share acquisitions on • Bondholders • Total firm value NTU 2010 5

  6. Four Hypotheses • The first three are used in the literature to test the announcement effect of equityholders. (1). Monitoring Hypothesis • Uses traditional agency theory. • Asserts that blockholders are effective monitors. • Recent theories suggest that their trading could also exert governance power (Admati and Pfleiderer (2009), Edmans (2009)). • Prediction: (+) stock return, (+) bond return NTU 2010 6

  7. Four Hypotheses (2). Certification Hypothesis • Uses Myers and Majluf (1984) model. • Asserts that blockholders are more accurate in assessing firm value than the market. • Their purchases of target firm shares signal either undervaluation or brighter future investment opportunities. • This applies especially for private placements. • Prediction: (+) stock return, (+ or zero) bond return NTU 2010 7

  8. Four Hypotheses (3). Managerial Entrenchment Hypothesis • Target management places shares with friendly investors who help to entrench incumbent management. • Barclay, Holderness, and Sheehan (2001, 2007) find that announcement returns are positive for block trades, but not for private placements. • Prediction: (-) stock return, (-) bond return NTU 2010 8

  9. Four Hypotheses (4). Wealth Transfer Hypothesis • If firm value is held constant and if there is no dead-weight cost, any wealth gains for one group of claimholders must come from the other group. • Given that stockholder wealth increases with block acquisitions, bondholder wealth should decrease. • Prediction: (+) stock return, (-) bond return NTU 2010 9

  10. Four Hypotheses – Summary NTU 2010 10

  11. Sample Selection • Sample of partial share acquisitions: from SDC, 1982-2008 • Bond data are collected from several databases: • Lehman Brothers Fixed Income, Moody’s/Mergent Bond Record, S&P’s Bond Guide • Details of the sample screening procedure is described in the paper. • Total 2,206 deals: 367 deals (936 bonds) with both stock and bond returns available. NTU 2010

  12. Measuring Excess Returns • Excess returns are measured over 2 event windows: Month (-1, 0) and (-1, 1) • Excess Stock Return = Target stock’s monthly stock return – CRSP VW market return • Excess Bond Return = Target stock’s monthly bond return – Index return • Index return is calculated based on 11 bond ratings from S&P and 2 maturity categories (Long term and Intermediate term) NTU 2010

  13. Univariate Evidence – Table 4 (Full Sample) NTU 2010

  14. Univariate Evidence – Table 4 (Selected Subsamples, Month (-1, 0)) NTU 2010

  15. Univariate Evidence for Excess Firm Return– Table 7 (Full Sample) NTU 2010

  16. Bond and Stock Returns Segmented by The Sign of Excess Firm Returns – Table 9 (Month(-1, 0)) Wealth Transfer Hypothesis Managerial Entrenchment Hypothesis NTU 2010

  17. Examining the conflict of interest between stockholders and bondholders • The evidence of positive excess stock return and negative excess bond return suggests increased conflict of interest between these two groups of claimholders when block acquisitions are announced. • We investigate post-acquisition firm performance using several metrics. NTU 2010

  18. Examining the conflict of interest between stockholders and bondholders – Table 10 NTU 2010

  19. Contributions of This Study • Provides the first look at bondholder reaction to block share acquisitions: • Overall, excess bond return is negative while excess stock return is positive. • Support the wealth transfer hypothesis. • Shows that excess bond, stock, and firm returns vary significantly based on target-firm, bond, and deal characteristics: • The purchasing method matters: block trades vs. private placements. NTU 2010 19

  20. Contributions of This Study • Distinguishes among four distinct hypotheses and shows when they are supported. • Documents the source of the conflict between stockholders and bondholders for the case of block acquisitions. NTU 2010 20

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