Essays on Dividend Mispricing, International Loan Renegotiations, and Pricing Loan Covenants

Date
2022
Authors
Joseph, Kerron
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Abstract

This dissertation studies the mispricing of acquirer dividends in M&A deals, examines the renegotiation likelihood of international lenders in syndicated loans, and proposes a new methodology to value loan covenants. The first essay explores the mispricing of ordinary dividends during an all-stock M&A transaction. Stock prices of targets in all-stock merger deals should reflect acquirer share values, net of expected dividend payments before deal completion. If target stock prices have fully anticipated acquirer dividend payments, target stock returns on the acquirer ex-day should be unaffected. Instead, I find that they are negatively related to the size of acquirer dividends. The delayed adjustment to acquirer dividends implies overvaluation of target stocks immediately after the merger announcement. These results are robust to different regressions specifications, subsamples, and falsification tests. In the second essay, I analyze which macroeconomic factors cause international lenders to drop out of syndicated loans. Increases in capital requirements in the lender country and decreases in borrower country policy rates imply a greater likelihood that foreign lenders stop supplying capital in international syndicated loans. These results are robust to the inclusion of borrower country, lender country, and borrower-round fixed effects. Using lender country capital regulations as instruments, I find evidence of significant economic spillover effects as international lender exits imply smaller loan amounts and shorter maturities. My third essay uses an option pricing model framework to determine the value of loan covenants. Private debt contracts frequently include financial covenants which facilitate the transfer of control rights to the lender in the event of a default. I show that the value of covenants in private debt contracts can be determined using an option pricing model. Using the Debt to EBITDA covenant in a sample of U.S. loan contracts, I find that firms with more assets, higher market to book ratios, and better credit ratings are associated with less valuable covenants. The economic value of the Debt to EBITDA covenant using the option model is 17 bps on average, significantly different from the 97 - 160 bps estimated by alternative pricing models currently used in the literature.

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Keywords
Mispricing of acquirer dividends, Value of loan covenants, Syndicated loans, International lenders
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Department
Finance