How Do Mergers and Acquisitions Affect Bondholders in Europe? Evidence on the Impact and Spillover of Governance and Legal Standards

Abstract: This paper contributes to the comparative corporate governance literature by showing how cross-country differences in governance and legal standards affect the bondholder wealth effects of European merger and acquisitions (M&As). Using investment-grade Eurobonds, we find some remarkable results. Firstly, M&As involving European firms are considerably more bondholderfriendly than are US domestic deals. Bidding firm bondholders earn economically significant positive returns, while target bondholders incur positive but insignificant returns. Overall, acquisitions do generate value to European bidding firms, but most of the wealth effect is captured by the bondholders. Secondly, bondholder gains in both bidding and target firms are systematically higher in M&As that involve Continental European firms. Thirdly, bidder abnormal bond returns are lower in cross-borderdeals. However, this is counterbalanced if creditor rights and the efficiency of credit contract enforcement are stronger in the target country. There is also strong evidence that, consistent with crossborder spillovers, improved creditor protection redistributes wealth from shareholders to bondholders. Finally, we document that bondholder wealth changes are subject to changes in asset risk and to a negative listing effect similar to that previously reported for changes in shareholder wealth. Keywords: Bondholder returns, Eurobonds, Mergers and acquisitions, Creditor rights, Takeover JEL Codes: G34, G32, G12, G14