Mai Iskandar-Datta

Bank monitoring and the pricing of corporate public debt

We examine whether the existence of a bank/firm relationship lowers the cost of public debt financing. Using a sample of first public straight debt o⁄ers, we test the crossmonitoring e⁄ect of bank debt and Diamond’s (1991, Journal of Political Economy, 99, 689—721) reputation-building argument. We find that the existence of bank debt lowers the at-issue yield spreads for first public straight bond o⁄ers by about 68 basis points, on average. Consistent with Diamond’s reputation-building argument, we document that firm reputation is negatively related to the at-issue yield spread for initial public debt o⁄ers. ( 1999 Elsevier Science S.A. All rights reserved.

Some Evidence on the Uniqueness of Initial Public Debt Offerings

Debt initial public offerings (IPOs) represent a major shift in a firms financing policy by both extending debt maturity and altering the public-private debt mix. In contrast to findings for seasoned debt offerings, we document a significantly negative stock price response to debt IPO announcements. This result is consistent with debt maturity and debt ownership structure theories. The equity wealth effect is negatively related to the offers maturity, and positively related to the degree of bank monitoring. We find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response. Copyright The American Finance Association 2000.

Value creation in corporate asset sales: The role of managerial performance and lender monitoring

Abstract Examining stockholder and bondholder wealth of acquirers and sellers, we find that asset sales are firm value enhancing for the seller but value neutral for the acquirer. Although divestitures are typically viewed as more synergistic and friendly transactions than takeovers, we find using a matched acquirer–seller sample, that the net wealth effect from the transaction is not significantly different from zero. However, those transactions that involve high- q bidders and low- q sellers create maximum value for acquirers and for the transaction as a whole. Further, low- q bidder/low- q seller transactions are value destroying. We find that seller gains are only related to the seller’s managerial performance. We document that private lender monitoring enhances transactional value in corporate divestitures. Collectively, the analysis shows that well-managed and highly monitored firms are more likely to benefit from asset sale transactions.

An empirical investigation of the role of indenture provisions in determining bond ratings

Abstract This paper documents the occurrence of indenture provisions of newly issued bonds and the relevance of these provisions to a bonds rating. A chronicle of the various combinations of restrictive covenants reveals that four covenant combinations account for over 90% of the issues. The evidence also suggests that convertibility of an issue vitiates stockholder-bondholder conflict because these issues have few, if any, restrictive covenants. Also, the indenture provisions of low rated, subordinated issues appear to reflect a concern about the underinvestment problem while the opposite holds for high rated, nonsubordinated issues. The addition of indenture provisions to a bond rating model is shown to create a model superior to previous rating models. This finding highlights the complex nature of the corporate financial contracting process. Consistent with past evidence, Moodys ratings are predicted more accurately than S&Ps ratings and split rated issues are predicted less accurately than commonly rated issues.

Does insider trading have information content for the bond market

The study is the first to document that there is significant information content in stock trading by registered corporate insiders for the bond market. We report significant positive price reactions for convertible and straight bonds in response to the Wall Street Journals Insider Trading Spotlight publication of insider buy transactions and significant negative reactions for insider sell transactions. The stock market response to the publication of the insider transactions, although weaker than bond market reaction, is also found to be significant suggest that bond market participants extract the quality of the insider trading signal by observing factors, such as the dollar volume of the trade, the percentage change in the holding of the insider, and the insiders position in the firm. Lower- rated (riskier) bonds are found to be more sensitive to the information than higher-rated issues. The empirical evidence presented in the paper suggest that the absence of any reporting requirement for insider bond transactions may create an enhanced opportunity for the insiders to exploit private information to expropriate wealth from uninformed bond traders. (Recently, the Wall Street Journal carried an article about this paper on February 8, 1995 on page C1.)

The information content of bankruptcy filing on securityholders of the bankrupt firm: An empirical investigation

This paper captures the information content of bankruptcy announcements on stockholders and three different classes of debtholders using daily excess returns. Significant negative stock price reaction to the filing announcement is documented. More interestingly, the secured debtholders are unaffected by the announcement. However, the unsecured and the convertible debt classes exhibit significant adverse price reaction. During the event period, the secured debt group gains significantly while all other classes experience substantial losses. Cross-sectional analysis reveals that the complexity of the reorganization process, the security of the debt issue, and to some degree the anticipation of the bankruptcy filing are important determinants of bond excess returns. It is also found that leverage plays a significant role in preserving firm value by forcing the firm to confront reorganization sooner.

Corporate partial acquisitions, total firm valuation and the effect of financing method

Previous studies on partial acquisitions focusing solely on stockholder wealth report mixed results about the valuation effect of these transactions. By examining the percent and dollar excess returns of the acquiring firms bondholders and stockholders, this study is able to conclude unambiguously that partial acquisitions are, at best, value neutral. Our analysis indicates that any wealth losssuffered by the firm is completely absorbed by the bondholders. Moreover, by distinguishing between the pure effect of the acquisition (the investment decision) and the effect of the financing method, our findings show that there is a wealth redistribution from bondholders to stockholders associated with the method of financing used. Supporting our expectation, the results strongly indicate a preference structure for bondholders for acquisition financing.

Takeover defenses and wealth effects on securityholders: The case of poison pill adoptions

Abstract This is the first study to examine the valuation effects of any antitakeover amendment on both bondholders and stockholders. We present new evidence documenting that, on average, there is a significant wealth loss experienced by bondholders at poison pill adoption announcement, while stockholders are unaffected. Our finding of significant bondholder losses is consistent with the proposed negative signal hypothesis. We document results which indicate that bondholders correctly anticipate the degree of leverage increase at the time of the announcement. We also show that the proportion of insider ownership is negatively related to bondholder wealth effect at announcement. This supports the notion that higher insider (manager) ownership leads to a greater alignment of manager-stockholder interests while increasing the stockholder-bondholder agency costs. Long-run analysis of leverage and performance measures reveal that pill adopting firms are not under-leveraged as compared to their industry rivals. However, supporting the negative signal hypothesis, the leverage of sample firms rises significantly after the pill adoption. Performance measures reveal that sample firms significantly underperform their industry cohorts. This result suggests that poison pill adoptions are motivated by poor managers attempting to immunize themselves from the disciplinary actions of the corporate control market.

New Evidence on the Valuation Effects of Convertible Bond Calls

This study examines the wealth effects of convertible bond call announcements on stockholders, straight bondholders, and called and non-called convertible debtholders. We document that forced conversions are associated with a significant loss in firm value. The results suggest that convertible call announcements can trigger both negative signal and wealth transfer effects. We show that at least part of the negative effect on stock prices results from wealth transfer to straight bondholders. Our analysis also lends empirical validity to the common contention that called convertible bondholders suffer wealth expropriation due to the elimination of the premium. The wealth effect on non-called convertible debtholders is insignificant. Cross-sectional analysis reveals that the negative signal effect is important in explaining bond, stock, and firm excess returns. Finally, we present evidence that refutes the notion that bonds are called to relieve the firm from restrictive debt covenants.

Convertible Bond Calls: Resolution of the Information Content Puzzle

This study resolves the puzzling evidence on convertible bonds by documenting that conversion-forcing calls are indeed bad news. Supporting the long-term implications of Harris and Raviv (1985), we document that the common stocks of calling firms substantially underperform their benchmarks by a median of 64% over the five-year post-call period. In contrast, firms that choose not to call their in-the-money convertibles exhibit no long-run abnormal performance. We show that studies drawing conclusions based on short-term price reversal immediately following the call fail to completely capture the valuation effect that occurs over a longer time horizon. We document that the market condition at the time of the call (issuance volume) and cash flow benefits related to the call (relation between dividend and after tax coupon payment) influence the post-call stock price performance. Our analysis also reveals that the post-call underperformance of high-growth firms is more pronounced than that of low-growth firms, indicating greater market exuberance associated with high-growth firms at the time of the call.