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Corporate spin-offs, bankruptcy, investment, and the value of debt

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  • Hennessy, David A.

Abstract

In a risk-neutral stochastic environment where bankruptcy is possible, it is well-established that coinsurance incentives may lead creditors to prefer mergers over spin-offs, while shareholders may prefer spin-offs. This paper shows that there are two distinct reasons for this. One is due to the concavity of the debt payoff function in the face value of the debt, while the other arises from imperfect covariation in ultimate firm values. For the latter reason, conventional measures of covariation are not sufficient to evaluate the impact on ex-ante debt value. Also considered are the effects of mergers and spin-offs on investment decisions.
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  • Hennessy, David A., 2000. "Corporate spin-offs, bankruptcy, investment, and the value of debt," Insurance: Mathematics and Economics, Elsevier, vol. 27(2), pages 229-235, October.
    • Handle: RePEc:eee:insuma:v:27:y:2000:i:2:p:229-235
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    Cited by:

    1. Md Hamid Uddin, 2010. "Corporate Spin-Offs And Shareholders' Value: Evidence From Singapore," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 4(4), pages 43-58.
    2. Hennessy, David A. & Saak, Alexander E. & Babcock, Bruce A., 2003. "Fair Value Of Whole-Farm And Crop-Specific Revenue Insurance," 2003 Annual meeting, July 27-30, Montreal, Canada 21988, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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