Bond-blockholders and corporate acquisitions

Abstract

Research Question/IssueWe examine whether bond-blockholders provide additional, distinct monitoring roles in merger and acquisition (M&A) processes beyond those of equity-blockholders. Using a sample of 4309 M&A deals reported between 2001 and 2010, we shed new light on the monitoring spillover effects of bondholders to shareholders in the context of M&As. Research Findings/InsightsOur findings demonstrate a positive relationship between the presence of bond-blockholders (or a change in their position) and acquiring firms' abnormal return announcements, which supports the monitoring spillover effects from bondholders to shareholders in M&A processes. Our subsample analyses indicate that bond-blockholders are better monitors of (1) overconfident CEOs engaging in M&As, (2) CEOs exhibiting risk-taking behavior in M&As, and (3) entrenched managers participating in M&As. Moreover, we discover a positive association between the previous quarter's changes in "monitoring" bond-blockholders' positions and the acquiring firms' 3-day cumulative abnormal returns (CARs). Theoretical/Academic ImplicationsIn corporate finance literature, equity-blockholders have long been recognized as effective monitors. Despite the importance of debt as most firms' primary funding source, the benefits of debt for monitoring the efficiency of managers and their organizations have been largely overlooked in the existing literature. Thus, this study provides evidence on the additional and distinct monitoring roles of bond-blockholders beyond those of equity-blockholders in M&A processes and the impact of bond-blockholders on shareholders' wealth around M&A announcements. Practitioner/Policy ImplicationsThis study offers insights to policymakers interested in enhancing the legitimacy of corporate governance on the monitoring spillover effects of bondholders to shareholders in the context of M&As. In addition, our findings suggest that bondholders can have a long-term perspective beyond the limited time horizon of bond maturity and influence M&A processes positively. Thus, this study has significant implications for managers and practitioners interested in which investors positively affect M&As.