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.

We show that private equity-sponsored public-to-private buyouts in the US evoke positive externality effects among their targets’ industry peers. Industrial organization and strategic theory suggest buyouts may impact their industry peers as a result of increased takeover threat and competitive pressure felt by the peers. We document that buyouts are associated with positive market returns and better fundamental performance in the three years following a buyout acquisition in the industry. Drilling down into specific channels of improvement, we document that industry peers mitigate the increased takeover threat and competitive pressure by significantly improving several dimensions of operational efficiency, by engaging in long-term innovation and by enhancing their corporate governance. Our results suggest that competitive factors rather than takeover threat is responsible for the spillover effects.

This paper investigates the resiliency of the new‐issue high‐yield bond market by examining the changes in implied default rates of such bonds before and after the largest high‐yield bond default, i.e., the LTV bankruptcy. Specifically, the paper compares implied default probabilities of high‐yield bonds during the post‐LTV period calculated from actual new‐issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred. A comparison of these probabilities reveals that the market's perception of default on the high risk segment of the bond market increased significantly after the LTV bankruptcy. However, the effect was transitory, lasting only six months. Thus, the market was resilient to a major default.

This paper investigates the resiliency of the new-issue high-yield bond market by examining the changes in implied default rates of such bonds before and after the largest high-yield bond default, i.e., the LTV bankruptcy. Specifically, the paper compares implied default probabilities of high-yield bonds during the post-LTV period calculated from actual new-issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred. A comparison of these probabilities reveals that the market's perception of default on the high risk segment of the bond market increased significantly after the LTV bankruptcy. However, the effect was transitory, lasting only six months. Thus, the market was resilient to a major default.

Stock market reaction suggests that despite improved disclosure and increased accountability, Sarbanes-Oxley Act (SOX) is too costly and not beneficial. Noting that bondholders are likely to reap the many potential benefits of SOX without bearing the brunt of costs, we examine how SOX affected corporate credit spreads to better assess its benefits. SOX has led to a significant structural decline in spreads of at least 27 basis points. Riskier firms (low rating, long maturity, high leverage, and small size) and firms closely related to SOX major provisions (earning variability, managerial trading, and corporate governance) experience greater declines in spreads.

The recent surge in the use of team-managed funds in the mutual fund industry suggests that the benefits of team management might outweigh its costs. However, extant empirical evidence is not consistent with the view that team-managed funds generate superior returns relative to individual-managed funds. We argue that the benefits of team management are likely to be manifested in the presence of strong board monitoring because the potential free-rider problems within team-managed funds are alleviated. Our findings, that smaller boards and boards with a higher proportion of independent directors are positively associated with performance in team but not individual-managed funds, are consistent with this view. Our results suggest that in team-managed fund structures, where the potential free-riding problems exist, the presence of strong board monitoring improves fund performance.

Previous studies document a negative return to equity on the announcement of an SEO. However, the effects of SEO announcements on bonds have received little attention. We find that bondholders experience a significant positive return on the announcement of an SEO and this effect is more pronounced for bonds with lower ratings. We examine alternate explanations for bond market reactions to SEO announcements including the leverage risk reduction, wealth transfer, and information signaling hypotheses. Overall, our results are most consistent with the leverage risk reduction hypothesis.