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Handbook of Empirical Corporate Finance by B. Espen Eckbo

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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 ...

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