Creditor rights, claims enforcement, and bond performance in mergers and acquisitions

Abstract

This article shows that country-level differences in creditor protection affect bond performance around cross-border M&A announcements. Using Eurobonds and a global sample of 1,100 cross-border M&As, we find that the bondholders of bidding firms respond more positively to deals that expose their firm to a jurisdiction with stronger creditor rights and more efficient claims enforcement through courts. Positive creditor protection spillovers are enhanced by now-global jurisdictional cooperation in multinational insolvencies and creditors’ ability to do insolvency arbitrage. The spillover effects we observe are stronger for firms with higher asset risk, longer maturity bonds, and a higher likelihood of financial distress.

Résumé

Cet article montre que les différences dans la protection des créanciers au niveau des pays influencent les performances des obligations concernant les annonces de fusions-acquisitions (FA) internationales. Utilisant des euro-obligations et un échantillon global de 1 100 FA transfrontalières, nous constatons que les porteurs d’obligations d’entreprises qui enchérissent répondent plus positivement aux transactions qui exposent leur entreprise à une juridiction offrant des droits plus forts aux créanciers et une gestion plus efficace des revendications par le biais de tribunaux. Les retombées d’une protection positive des créanciers sont renforcées par la coopération juridictionnelle désormais mondiale concernant l’insolvabilité des multinationales et la capacité des créanciers à avoir recours à l’arbitrage d’insolvabilité. Les retombées que nous observons sont plus fortes pour les entreprises à risque d’actifs plus élevé, à maturité d’obligations plus longue et à détresse financière plus probable.

Resumen

Este artículo muestra que las diferencias a nivel nacional en la protección de los acreedores afectan el rendimiento en torno a los anuncios de fusiones y adquisiciones transfronterizas. Usando Eurobonos y una muestra global de 1.100 fusiones y adquisiciones transfronterizas, encontramos que los titulares de bonos de firmas oferentes responden más positivamente a ofertas que exponen sus empresas a una jurisdicción con unos derechos más fuertes para los acreedores y reclamaciones más eficientes mediante tribunales. Los efectos indirectos de protección positiva de los acreedores son reforzados mediante cooperación jurisdiccional ahora mundial de las insolvencias multinacionales y la habilidad del acreedor a hacer arbitraje de insolvencia. Los efectos secundarios que observamos son más fuertes para empresas con riesgo más alto de sus activos, bonos de vencimiento a plazos más largos, y mayor posibilidad de problemas financieros.

Resumo

Este artigo mostra que as diferenças a nível nacional na proteção de credores afetam o desempenho de títulos no entorno de anúncios sobre M & A transfronteiriças. Usando Eurobonds e uma amostra mundial de 1.100 M & A transfronteiriças, descobrimos que os detentores de títulos de empresas a serem adquiridas respondem mais positivamente a ofertas que expõem a empresa a uma jurisdição com direitos de credores mais fortes e mais eficiente aplicação de demandas através de tribunais. Os efeitos suplementares positivos da proteção a credores são reforçados pela cooperação jurisdicional agora global em insolvências multinacionais e pela capacidade dos credores para fazer arbitragem na insolvência. Os efeitos suplementares que observamos são mais fortes para as empresas com maior risco de ativos, títulos com prazos mais longos, e uma maior probabilidade de dificuldades financeiras.

概要

这篇文章显示, 在债权人保护方面国家层面的差异影响跨国并购公告时的债劵业绩。使用欧洲债券和全球1,100个跨国并购的样本, 我们发现, 投标公司债券持有者们对那些使他们的公司处在具有更强的债权人权利和更有效的法院执法索赔的司法管辖区的交易的反应更为积极。积极的债权人保护溢出效应通过跨国破产的当下全球管辖区的合作及债权人破产套利的能力而增强。我们观察到的溢出效应对具有较高资产风险, 较长期限债券, 以及财务困境可能性较大的公司更强。

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Acknowledgments

The authors are grateful for valuable suggestions to Lieven Baele, Jonathan Batten, Arnoud Boot, Fabio Braggion, James Bromley, Sergei Davydenko, Allen Ferrell, Julian Franks, Xavier Giroud, Abe de Jong, Igor Loncarski, Florencio Lopez de Silanes, Alberto Manconi, Sophie Manigart, Marina Martynova, Colin Mayer, Maria Fabiana Penas, Mathieu Rosmarin, Stefano Rossi, Oliver Spalt, Chendi Zhang, and seminar participants at Harvard University, MIT, Boston University, Tilburg University, the University of Oxford, the University of Cambridge, the University of Toronto, Universitat Pompeu Fabra, ESSEC Business School, and annual meetings of the European Corporate Governance Institute, the European Finance Association and the European Financial Management Association. Luc Renneboog gratefully acknowledges funding from the Netherlands Organization for Scientific Research under the Shifts in Governance program, and from the European Commission under the New Modes of Governance project led by the European University Institute in Florence. Peter Szilagyi is grateful for funding from the European Commission through the European Corporate Governance Training Network.

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Correspondence to Peter G. Szilagyi.

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Supplementary information accompanies this article on the Journal of International Business Studies website (www.palgrave.com/journals)

Accepted by April Knill, Guest Editor, 21 August 2016. This article has been with the authors for two revisions.

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Appendix 1: Variable Descriptions

Appendix 1: Variable Descriptions

(i) Abnormal bond returns

Abnormal bond returns are the sum of daily abnormal bond returns over a matched benchmark index in the days [−5, +5] surrounding M&A announcements. Firms with multiple bonds are treated as value-weighted portfolios, where the weights are the market values of each bond two months before the deal announcement. Each benchmark index is segmented by currency (euro, pound sterling, or US dollar), credit rating (BBB, A, AA, and AAA) and duration (1–3, 3–5, 5–7, 7–10, and 10+ years). If a benchmark has less than seven bonds, a reserve benchmark is used with a duration of 1–5 or 5+ years. Value-weighted benchmarks are constructed using weights based on each bond’s market value. Bond ratings are from Standard and Poor’s or, when unavailable, Moody’s Investors Service. Source: Thomson Reuters Eikon.

(ii) Firm-level variables

Deal size (target/bidder) is the target firm’s book value of assets divided by the bidding firm’s book value of assets. It is measured at the fiscal year-end preceding the deal announcement and converted into euro where applicable. Source: Amadeus, CapitalIQ, Datastream, Orbis, Worldscope, Zephyr.

Return on assets (ROA) is earnings before interest and tax divided by the book value of assets. It is measured at the fiscal year-end preceding the deal announcement. Source: CapitalIQ, Worldscope, Zephyr.

Leverage is the book value of debt divided by the book value of assets. It is measured at the fiscal year-end preceding the deal announcement. Leverage in the combined firm is calculated using weights based on the book value of assets, converted into euro where applicable. For missing values industry averages are used. Source: Amadeus, CapitalIQ, Datastream, Orbis, Worldscope, Zephyr.

Asset risk is the standard deviation of unlevered daily stock returns. Unlevered stock returns are defined as the product of stock returns and (1 − leverage). The standard deviation of unlevered stock returns is computed over days [−750,−30] before deal announcements. Source: Datastream, Worldscope.

Bidder has creditor-shareholder is a dummy variable equal to one if the bidder has a creditor (bank or other financial institution) among its major shareholders. Source: Amadeus, Orbis, SDC, Zephyr.

(iii) Country-level variables

Creditor rights (max = 4) captures the number of laws protecting creditors from expropriation by more senior secured creditors. First, there are restrictions, such as creditor consent or minimum dividends, for a debtor to file for reorganization. Second, secured creditors are able to seize their collateral after the reorganization petition is approved, i.e. there is no “automatic stay” or “asset freeze.” Third, secured creditors are paid first out of the proceeds of liquidating a bankrupt firm, as opposed to other creditors such as the government or employees. Finally, management does not retain administration of its property pending the resolution of the reorganization. Source: Djankov et al. (2007).

Claims enforcement captures the efficiency of claims disputes resolution through courts, It is the number of calendar days needed to enforce a contract of unpaid debt worth 50% of a country’s GDP per capita. Source: Djankov et al. (2007).

Anti-director rights (max = 7) captures the laws that mandate provisions protecting minority shareholders from expropriation by managers or majority shareholders. The provisions include the right to an oppressed minority mechanism to seek redress in case of expropriation, voting rights, and rights to call a special shareholder meeting. Source: Djankov et al. (2008).

Rule of law index (max = 5) aggregates several indicators that measure how well agents abide by the rules of society. These include perceptions of the incidence of crime, the effectiveness and predictability of the judiciary and the enforceability of contracts. Source: World Bank Worldwide Governance Indicators.

Legal origin is a dummy variable that identifies the legal origin of each country. The five origins are English, French, German, Nordic and Socialist. Source: Djankov et al. (2007).

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Renneboog, L., Szilagyi, P.G. & Vansteenkiste, C. Creditor rights, claims enforcement, and bond performance in mergers and acquisitions. J Int Bus Stud 48, 174–194 (2017). https://doi.org/10.1057/s41267-016-0031-2

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Keywords

  • bondholder value
  • cross-border mergers and acquisitions (M&As)
  • creditor rights
  • legal enforcement
  • event study
  • Eurobonds

JEL Classification

  • G34
  • G32
  • G12
  • G14