Do Spin-offs Expropriate Wealth from Bondholders?
Article first published online: 11 SEP 2003
The Journal of Finance
Volume 58, Issue 5, pages 2087–2108, October 2003
How to Cite
Maxwell, W. F. and Rao, R. P. (2003), Do Spin-offs Expropriate Wealth from Bondholders?. The Journal of Finance, 58: 2087–2108. doi: 10.1111/1540-6261.00598
- Issue published online: 11 SEP 2003
- Article first published online: 11 SEP 2003
A wealth transfer from bondholders to stockholders is one of several hypotheses used to explain stockholder gains on the announcement of a spin-off. However, previous empirical research has not found systematic evidence supporting the wealth expropriation hypothesis. Using a larger sample with comprehensive bond data, we find evidence consistent with wealth expropriation. Bondholders, on average, suffer a significant negative abnormal return during the month of the spin-off announcement. However, even accounting for the loss to the bondholders, the aggregate value of the publicly traded debt and equity increases on a spin-off announcement, suggesting that the wealth expropriation hypothesis is not a complete explanation of the stockholder gains. In explaining the magnitude of the losses to bondholders, we find they are a function of the loss in collateral in the spun-off subsidiary and the level of financial risk of the parent firm. Consistent with a loss to bondholders, firms are more likely to have their credit rating downgraded than upgraded after a spin-off. Additionally, consistent with the wealth transfer hypothesis, losses to bondholders tend to be more severe, the larger the gains to shareholders.