Who Wins in Spinoffs and Why: Investigating the Stockholder-Bondholder Conflict in Corporate Spinoffs Via Information from CDS Markets

Abstract

This paper investigates the reaction of credit default swaps (CDS) to spinoff announcements between 2002 and 2017 in the US markets. Previous studies have consistently found positive cumulative abnormal returns (CARs) in the stock of publicly traded companies around the announcements of spinoffs. The existing literature, however, has not arrived at a consensus on the effects of spinoffs on the debtholders of these companies and whether the value gained by shareholders is a transfer from debtholders. This study approaches these questions by looking at the CDS on the debts of firms engaging in spinoffs. Using the constant mean return model, market models, and factor models based on recent research, I find significant, positive cumulative abnormal spread changes for the CDS on parent companies’ bonds in the three-day window surrounding spinoff announcements. These results support the wealth transfer hypothesis, i.e., spinoffs negatively impact debtholders. The effect remains positive and significant when the data are adjusted for skewness in abnormal spread changes.