The Impact of Merger Bids on the Participating Firms' Security Holders



  • E. HAN KIM

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    • Assistant Professor of Finance, Harvard University, and Professor of Finance, The University of Michigan, respectively. We wish to thank Michael Brennan, Eugene Fama, Bob Hamada, Bob Higgins, John Lintner, Larry Schall, Peter Dodd, and especially Michael Bradley for helpful comments, and Y. Yun for assistance in data collection. This research was supported by summer research grants from Harvard University and the University of Michigan Graduate School of Business Administration.


This paper investigates whether merger bids have an impact on the wealth of the participating firms' bondholders and stockholders. Monthly and daily bond and stock returns are calculated relative to the announcement date of a merger bid for a sample of conglomerate mergers. The results show that while the stockholders of target firms gain from a merger bid, no other securityholders either gain or lose. To provide direct evidence on the existence of “diversification effects” and “incentive effects,” we test whether the bondholders' returns are dependent upon the correlation between the returns of the merging firms and whether the size of the bondholders' and stockholders' returns in individual mergers are correlated. The results are consistent with a capital market that efficiently resolves conflicts of interest between stockholders and bondholders.