How Large Are the Coinsurance Benefits of Mergers?
Using a structural model, I estimate the value gain from coinsurance in mergers. For both diversifying and related mergers, the estimated value gains from coinsurance are small— smaller than the counterfactual gains if firms were to merge randomly—suggesting that coinsurance is not the motive for most mergers. However, coinsurance is large for some mergers: when smaller firms merge or when a highly levered target, that is distressed or close to distress, is acquired. The cumulative abnormal return around merger announcement increases 0.89% for every 1% estimated value gain from coinsurance, suggesting that stockholders benefit from coinsurance, contrary to a common claim in textbooks.
Corporate Finance (Primary Interest), Credit Risk (Secondary Interest)
Bond rating, diversification and the financial crisis (joint with Garrett Swanburg)
This paper documents that diversified firms enjoy superior bond ratings—even after controlling for risk factors commonly thought to influence bond ratings. The effect is strong in determining investment grade rating: diversified firms are significantly more likely to be awarded investment grade rating compared to single-segment firms with similar credit scores. During all the NBER recessions in our time-period, diversified firms were even more likely to be enjoy a relatively higher rating. Particularly, during the recent financial crisis, when, perhaps, firms needed credit the most, diversified firms were more likely to be retain their credit ratings. To explain this rating premium enjoyed by diversified firms, we propose two competing hypotheses: coinsurance, a risk-based explanation; and, analyst bias, a behavioral explanation.
WORK IN PROGRESS
Forecasting bond rating downgrade using Distance-to-Default
Corporate inversions through mergers: how large are the benefits?
Do mergers reduce systematic risk?