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Mergers and Investment Incentives

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  • John, Teresa A.

Abstract

This paper explores the effects of mergers on the investment incentives of the levered firm and on levered firm value. Under a fairly broad set of assumptions, it is shown that most firm combinations “improve†investment incentives, bringing about a reduction in the agency costs of underinvestment associated with risky debt. The effect of the merger on debt and equity claim values is also explored. If not properly anticipated, the merger may create a wealth transfer from equity holders to bondholders. Such a wealth transfer includes, but is not limited to, the “coinsurance effect.â€

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  • John, Teresa A., 1986. "Mergers and Investment Incentives," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 393-413, December.
    • Handle: RePEc:cup:jfinqa:v:21:y:1986:i:04:p:393-413_01
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    Cited by:

    1. Luc Renneboog & Peter G. Szilagyi, 2008. "Corporate Restructuring and Bondholder Wealth," European Financial Management, European Financial Management Association, vol. 14(4), pages 792-819, September.
    2. Dirk Hackbarth & Richmond Mathews & David Robinson, 2014. "Capital Structure, Product Market Dynamics, and the Boundaries of the Firm," Management Science, INFORMS, vol. 60(12), pages 2971-2993, December.

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