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    Division Buyout and Refinancing of Event Risk Covenant Bonds: Evidence from the Long-Term Stock Performance

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    Author
    Tewari, Manish
    Keyword
    Event Risk Covenants
    Bonds
    Division Buyout
    Parent Firm
    Long-Term Performance
    Journal title
    International Business Research
    Date Published
    2013-05-17
    Publication Volume
    6
    Publication Issue
    6
    
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    URI
    http://hdl.handle.net/20.500.12648/2102
    Abstract
    The focus of this paper is to assess the long-term common stock performance of the parent firms that underwent divisional buyout (DBO) and had event risk covenant (ERC) bonds outstanding at the announcement of the DBO. The final sample of 46 parent firms exhibit a common characteristic where all the ERC bonds were redeemed (either called above par or put on the firm at par) or restructured at a higher cost to the firm around DBO announcement date due to the presence of ERCs. ERCs are triggered since the parent firms that divest their assets through a DBO reveal future cash flow volatility, which has potential to lower the value of existing bonds. This refunding of the bonds leads to costly refinancing for the parent firms, which has long-term implications. I find significantly negative cumulative abnormal returns at the issue date of the ERC bonds for these firms due to potential managerial entrenchment and foregone transfer of wealth from bondholders to stockholders. Consistent with the finance literature, I find significantly positive cumulative abnormal returns for parent firms at the announcement of the DBO. These positive short-term returns at the announcement do not translate into long-term positive returns. The common stock of these parent firms significantly underperforms the market over the periods three, four, and five years after the DBO date. This dichotomy can be attributed to the security market overreaction to the announcement of DBO. The long-term underperformance can be attributed to the costly refinancing of the ERC bonds.
    Citation
    International Business Research; Vol. 6, No. 6; 2013 ISSN 1913-9004 E-ISSN 1913-9012 Published by Canadian Center of Science and Education doi:10.5539/ibr.v6n6p1
    DOI
    https://doi.org/10.5539/ibr.v6n6p1
    ae974a485f413a2113503eed53cd6c53
    https://doi.org/10.5539/ibr.v6n6p1
    Scopus Count
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    Business-Economics Faculty Publications

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