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Mergers and Investment Incentives

Published online by Cambridge University Press:  06 April 2009

Teresa A. John
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Abstract

This paper explores the effects of mergers on the investment incentives of the levered firm and on levered firm value. Under a fairly broad set of assumptions, it is shown that most firm combinations “improve” investment incentives, bringing about a reduction in the agency costs of underinvestment associated with risky debt. The effect of the merger on debt and equity claim values is also explored. If not properly anticipated, the merger may create a wealth transfer from equity holders to bondholders. Such a wealth transfer includes, but is not limited to, the “coinsurance effect.”

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 21 , Issue 4 , December 1986 , pp. 393 - 413
Copyright
Copyright © School of Business Administration, University of Washington 1986

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References

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