Jim Hsieh (George Mason) Dolly King (UNC Charlotte) NTU, 12/10/2010

Two Different Types of Block Share Acquisitions  Block Trades Blockholders purchase shares from other shareholders in the market.  Private Placements Blockholders purchase block shares directly from the target firm. 2 NTU 20102

Why This Study?  It is documented extensively in the literature that blockholders play an important and positive role in corporate policy and performance.  Theoretical papers: Threat of corporate control: Shleifer and Vishny (1986), Grossman and Hart (1988) Monitoring/intervention: Admati, Pfleiderer, and Zechner (1994), Maug (1998) Trading: Admati and Pfleiderer (2009), Edmans (2009) 3 NTU 20103

Why This Study?  Empirical evidence: Block share acquisitions, on average, are associated with positive changes in shareholder value. They are also associated with significant improvements in firm performance.  However, we still do not know: The impact of those acquisitions on holders of the target firm’s debt securities. The full consequences of those acquisitions on the wealth of different claimholders. 4 NTU 20104

Objective of This Study  Examine the effects of block share acquisitions on Bondholders Total firm value 5 NTU 20105

Four Hypotheses  The first three are used in the literature to test the announcement effect of equityholders. (1). Monitoring Hypothesis Uses traditional agency theory. Asserts that blockholders are effective monitors. Recent theories suggest that their trading could also exert governance power (Admati and Pfleiderer (2009), Edmans (2009)). Prediction: (+) stock return, (+) bond return 6 NTU 20106

Four Hypotheses (2). Certification Hypothesis Uses Myers and Majluf (1984) model. Asserts that blockholders are more accurate in assessing firm value than the market. Their purchases of target firm shares signal either undervaluation or brighter future investment opportunities. This applies especially for private placements. Prediction: (+) stock return, (+ or zero) bond return 7 NTU 20107

Four Hypotheses (3). Managerial Entrenchment Hypothesis Target management places shares with friendly investors who help to entrench incumbent management. Barclay, Holderness, and Sheehan (2001, 2007) find that announcement returns are positive for block trades, but not for private placements. Prediction: (-) stock return, (-) bond return 8 NTU 20108

Four Hypotheses (4). Wealth Transfer Hypothesis If firm value is held constant and if there is no dead-weight cost, any wealth gains for one group of claimholders must come from the other group. Given that stockholder wealth increases with block acquisitions, bondholder wealth should decrease. Prediction: (+) stock return, (-) bond return 9 NTU 20109

Four Hypotheses – Summary 10 NTU Abnormal Change in Bond ReturnsStock ReturnsFirm Value Monitoring HypothesisPositive Certification Hypothesis Positive or no effect Positive Managerial Entrenchment HypothesisNegative Pure Wealth Transfer HypothesisNegativePositiveNo effect

Sample Selection  Sample of partial share acquisitions: from SDC,  Bond data are collected from several databases: Lehman Brothers Fixed Income, Moody’s/Mergent Bond Record, S&P’s Bond Guide  Details of the sample screening procedure is described in the paper.  Total 2,206 deals: 367 deals (936 bonds) with both stock and bond returns available. NTU

Measuring Excess Returns  Excess returns are measured over 2 event windows: Month (-1, 0) and (-1, 1)  Excess Stock Return = Target stock’s monthly stock return – CRSP VW market return  Excess Bond Return = Target stock’s monthly bond return – Index return Index return is calculated based on 11 bond ratings from S&P and 2 maturity categories (Long term and Intermediate term) NTU

Univariate Evidence – Table 4 (Full Sample) NTU Excess Bond Returns (%) Excess Stock Returns (%) NMeanMedianNMeanMedian Panel A. Month (-1, 0) ***-0.246*** ***3.302*** Panel B. Month (-1, 1) ***-0.310*** ***2.536***

Univariate Evidence – Table 4 (Selected Subsamples, Month (-1, 0)) NTU Excess Bond Returns (%) Excess Stock Returns (%) NMeanMedianNMeanMedian Sample Grouped by Bond Rating Investment grade ***-0.258*** ***4.170*** Below investment grade ***-0.235** ***1.867*** Difference1.053*** Sample Grouped by Purchasing Method Block trade ***-0.307*** ***4.958*** Private placement *** Difference1.157** **3.168*** Sample Grouped by Institutional Ownership Low IO ***-0.545*** ***2.351*** High IO **-0.142* ***4.817*** Difference-2.045***-0.403***

Univariate Evidence for Excess Firm Return – Table 7 (Full Sample) NTU (Panel A). Month (-1, 0) (Panel B). Month (-1, 1) NMeanMedianNMeanMedian ***2.365*** ***2.924***

Bond and Stock Returns Segmented by The Sign of Excess Firm Returns – Table 9 (Month(-1, 0)) NTU Firm Return ≤ 0Firm Return > 0 P-Value of the (N=134)(N=233) Difference Panel A.1. Excess Bond Return (%): Mean-2.660***0.041(0.001) Median-0.495***-0.057(0.003) Percent Positive[39.55%][48.50%] Panel A.2. Excess Stock Return (%): Mean ***19.193***(0.000) Median ***14.218***(0.000) Percent Positive[10.45%][96.57%] Wealth Transfer Hypothesis Managerial Entrenchment Hypothesis

Examining the conflict of interest between stockholders and bondholders  The evidence of positive excess stock return and negative excess bond return suggests increased conflict of interest between these two groups of claimholders when block acquisitions are announced.  We investigate post-acquisition firm performance using several metrics. NTU

Examining the conflict of interest between stockholders and bondholders – Table 10 NTU Percent of deals MeanMedian with positive values with negative values Panel A. Stock-related Variables  (Average excess monthly return) %51.74%  (Average excess monthly volatility) %49.71% Panel B. Accounting-related Variables  (ROA) ** ***43.56%56.44%  (Cash/Total assets) %48.40%  (Free cash flows/Total assets) ***42.18%57.82%  (Dividend per share) **0.0000***25.80%36.31%  (Repurchase per share) **0.0000***31.21%23.25%

Contributions of This Study  Provides the first look at bondholder reaction to block share acquisitions: Overall, excess bond return is negative while excess stock return is positive. Support the wealth transfer hypothesis.  Shows that excess bond, stock, and firm returns vary significantly based on target-firm, bond, and deal characteristics: The purchasing method matters: block trades vs. private placements. NTU

Contributions of This Study  Distinguishes among four distinct hypotheses and shows when they are supported.  Documents the source of the conflict between stockholders and bondholders for the case of block acquisitions. NTU