Faculty of Economics and Business Administration Publications Database

Wealth Transfer Effects between Stockholders and Bondholders

Imbierowicz, Björn
Volume: 53
Number: 1
Pages: 23 - 43
Month: February
Link External Source: Online Version
Year: 2013
Keywords: Credit default swaps; Credit ratings; Credit rating rationale; Event study; Public information; Surprise; Wealth transfers
Abstract: Prior research has addressed the question of whether certain events cause a transfer of wealth between stockholders and bondholders but does not control for the events’ impacts on firms’ credit risk. This may explain why many studies fail to identify wealth transfers. By employing announcements of reductions in credit quality, we find that two types of events cause wealth transfers from bondholders to stockholders. These are unexpected increases in firm leverage, and the firms’ contemporaneous involvement in M&A. Both cases reveal positive excess stock returns and CDS premiums, which exhibit a significantly positive correlation.