Abstract
We examine wealth effects of the creditor in mergers with data of Chinese listed companies. The previous method is highly dependent on the bond price so that it is not feasible in undeveloped markets like China. To overcome this problem, we develop a new method based on option pricing approach. Our findings show that creditors of the ST can obtain significant wealth effects in the merger, while creditors of the healthy obtain negative wealth effects. We argue the reasons can be ascribed to the agency conflictions and information asymmetry between the primary creditor and the new controlling shareholder.
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Notes
- 1.
- 2.
For the bondholder of target firms, Marais et al. (1989) find excess returns are tiny. But Warga and Welch(1993) reports significant negative excess returns, and positive relationship between the rank of bonds and their muture time. Cook and Martin (1991) find it is the same with managerial buyout mergers.
- 3.
This is special for some Chinese stated-owned (SO) listed companies in the privation process. For these companies equity are transferred from on SO company to another SO one by central or local government or the parent company owned by them. So the trade has no compensation and we couldn’t get its price or valuate it appropriately. It is a kind of non market behavior and violate the assumptions of our model.
- 4.
When the finance of those companies get too worse, the securities exchange of Shanghai or Shenzhen can impose limits on their stock exchange. These are so call special treatment companies.
- 5.
The industry classification is based on the global industry classification system which is more suitable for investors.
- 6.
This finding is consistent with Moran and Betton (2004) based on option premium. According to the abnormal returns, they found that premium existed in merger option.
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Acknowledgments
We thank Jeffry Netter, Chung-Hua Shen and Qi Liang. The research of Xiangchao Hao is financially supported by the Ministry of Education of China (Project# 06JA790057), while research of Zhihui Gu is financially supported by National Natural Science Foundation of China (Project # 70802032 and 70801043).
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Gu, Z., Hao, X. (2011). Wealth Effects of the Creditor in Mergers: Evidence from Chinese Listed Companies. In: Wu, D. (eds) Quantitative Financial Risk Management. Computational Risk Management, vol 1. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-19339-2_16
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DOI: https://doi.org/10.1007/978-3-642-19339-2_16
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