Synergy, diversification, and incentive effects of corporate merger on bondholder wealth: some evidence

The theory relating to the effects of a merger on the wealth of bondholders implies countervailing results. On the one hand, bondholders might share the benefits of operating synergies and diversification with shareholders. On the other hand, they might suffer from an incentive effect–the expropriation by the shareholders. Studies by Kim and McConnell (1977) and Asquith and Kim (1982) find that the wealth of bondholders is not significantly affected by conglomerate mergers. Using a more inclusive sample and a different methodology, this study finds that the wealth of bondholders is affected positively by merger, which implies synergies to bondholders and/or a diversification effect. Furthermore, an incentive effect would be inferred if leverage were increased substantially after merger and if the size of the increase were inversely related to bondholder gains. Since neither of these events is observed, this study finds no evidence for an incentive effect.