Corporate Spin-Offs, Bankruptcy, Investment, and the Value of Debt

David Hennessy

Staff General Research Papers Archive from Iowa State University, Department of Economics

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.

Date: 2000-10-01
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Published in Insurance: Mathematics and Economics, October 2000, vol. 27, pp. 229-235

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Journal Article: Corporate spin-offs, bankruptcy, investment, and the value of debt (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:1898

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