The Shareholder-bondholder Conflict in European Corporate Spin-offs: An Empirical Investigation of the Wealth Expropriation Hypothesis

Abstract

The announcement of a corporate spin-off transaction has been shown to generate positive abnormal shareholder returns. One possible explanation to these positive returns is that shareholders are expropriating wealth from bondholders. This thesis examines the wealth expropriation hypothesis by conducting an event-study on 67 European corporate spin-off announcements over the period 2002-2019. By studying the reaction of common stock and public bonds, I find results consistent with a wealth expropriation as a partial explanation to the positive shareholder returns. Over a three-day event window, I find statistically significant abnormal mean returns of 1.553% to shareholders and -0.030% to bondholders, while the overall firm value increases. I also find a negative relation between abnormal changes in market value of equity and abnormal changes in market value of debt. Moreover, I also find some support for the hypothesis that differences in creditor protection between European countries have an impact on the magnitude of wealth expropriation. Furthermore, secured bonds, or bonds with restrictive covenants can provide solid protection against wealth losses. I find that a dividend restriction covenant in particular, provides strong protection for bondholders.