Bond Performance in Mergers and Acquisitions the Impact and Spillover of Governance and Legal Standards

Bond Performance in Mergers and Acquisitions: The Impact and Spillover of Governance and Legal Standards Luc Renneboog

Tilburg University, European Corporate Governance Institute

Peter G. Szilagyi

Judge Business School – University of Cambridge

This version: November 15, 2007

Abstract - This paper shows that bond performance around M&A announcements is extremely

sensitive to cross-country differences in governance and legal standards, using deals involving European bidders with outstanding Eurobonds. Firstly, stakeholder-oriented corporate governance ensures that Continental European bonds fare better in and respond less to the risk effects of M&As. Secondly, bonds fare worse in cross-border M&As ceteris paribus, but perform better when they become exposed to a stakeholder-oriented governance regime or a more creditor-friendly jurisdiction. The creditor protection spillovers we identify are much greater in scope than has been previously assumed, and are intensified by the ability of creditors to arbitrage across legal systems.

Keywords: Mergers and acquisitions; bond performance; creditor rights; legal arbitrage; corporate governance. JEL Classification: G34, G32, G12, G14.

The authors are grateful for valuable suggestions to Lieven Baele, Jonathan Batten, Arnoud Boot, Fabio Braggion, Sergei Davydenko, Hans Degryse, Piet Duffhues, Julian Franks, Florencio Lopez de Silanes, Marina Martynova, Colin Mayer, Joe McCahery, Maria Fabiana Penas, Enrico Perotti, Stefano Rossi, and seminar participants at the University of Oxford, the University of Cambridge, the University of Toronto, Universitat Pompeu Fabra, ESSEC Business School, the 2006 Workshop of the European Corporate Governance Institute in Venice, and the 2007 European Finance Association Meeting in Ljubljana. Luc Renneboog is grateful to the Netherlands Organization for Scientific Research for funding under the „Shifts in Governance‟ programme and to the European Commission via the „New Modes of...