Does Subsidiary Debt Expropriate Wealth from the Bondholders?

Abstract

I investigate the effect of subsidiary debt issuance on the bond- and stock- value of its parent
firm. Parent bondholders suffer a negative abnormal return of 35 bps in the week of the
subsidiary debt, but a jump in the stock returns by 70 bps. Consistent with bondholders
anticipating a transfer of assets to the shareholders, I find parent firms maintain a high
payout ratio after the issuance of subsidiary debt. An increase of the capital expenditures
by 11% explains the residual benefit on the shareholders’ wealth. The results suggest the
subsidiary debt is a tool to increase capital investments while keeping a stable dividend
payout ratio within corporate groups.