The Journal of Finance

The Takeover Deterrent Effect of Open Market Share Repurchases

Published: 08/14/2007   |   DOI: 10.1111/j.1540-6261.2007.01258.x

MATTHEW T. BILLETT, HUI XUE

This paper examines whether open market share repurchases deter takeovers. We model pre‐repurchase takeover probability as a latent variable and examine its impact on the firm's decision to repurchase shares. Given specification tests reject the Tobit model, we turn to the censored quantile regression method of Powell (1986, Journal of Econometrics 32, 143–155). We find a significantly positive relation between open market share repurchases and takeover probability, and we reconcile empirical findings in previous studies that contradict predictions. Repurchase activity is inversely related to firm size, consistent with smaller firms having greater information asymmetry, and is related to temporary, but not permanent, cash flows.

The Effect of Lender Identity on a Borrowing Firm's Equity Return

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04801.x

MATTHEW T. BILLETT, MARK J. FLANNERY, JON A. GARFINKEL

Previous research demonstrates that a firm's common stock price tends to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive borrower returns. This article investigates whether the lender's identity influences the market's reaction to a loan announcement. Although we find no significant difference between the market's response to bank and nonbank loans, we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns. This evidence complements earlier findings that an auditor's or investment banker's perceived “quality” signals valuable information about firm value to uninformed market investors.

Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01221.x

MATTHEW T. BILLETT, TAO‐HSIEN DOLLY KING, DAVID C. MAUER

We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large‐sample evidence of the incidence of covenants in public debt and construct firm‐level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms.

Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00628.x

Matthew T. Billett, Tao‐Hsien Dolly King, David C. Mauer

We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns. Additionally, target bonds have significantly larger returns when the target's rating is below the acquirer's, when the combination is anticipated to decrease target risk or leverage, and when the target's maturity is shorter than the acquirer's. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s.