Handbook of Empirical Corporate Finance

5. Bondholders, executives, and arbitrageurs

5.1. Takeovers and bondholder wealth

Corporate mergers affect the wealth of the target and the acquiring firms’ senior claimholders for the same reasons that they affect stockholders. Merger-induced synergies add security to outstanding bonds and therefore increase bond values, while value-reducing mergers reduce bond value. In addition, bondholders benefit from any co-insurance effect from combining the less than perfectly correlated cash flows of the bidder and target firms.¹¹¹ The coinsurance effect means that a merger that generates no synergies, and where the bidder firm neither overpays for the target nor manages to sell overpriced bidder stock to the target, nevertheless causes a wealth transfer ...