Coinsurance Effects of M&As and Financial Risks

Yun, Jeongsun; Jung, Mookwon

Korean Journal of Financial Studies 2014;43(2):439-460.
Published online April 30, 2014.

Jeongsun Yun, Mookwon Jung

인수합병의 보험효과와 재무위험

윤정선, 정무권

Abstract

This paper investigates whether stock market reactions to the announcement of M& As are affected by financial risks of the merging firms. In order to measure the financial risk, we use the difference between the market value of debt computed by Black-Scholes option pricing model and the book value of debt. We find that while the acquiring companies exhibit a positive stock market reaction to the announcements of corporate acquisitions, the market reactions are significantly more positive as the financial risk of the acquiring companies increase. These results are consistent with the view that the decrease in the expected cost of bankruptcy due to the coinsurance effects is more pronounced as the financial risk of the acquiring firm increases. The results remain unchanged even if we use the financial risk of the acquiring company relative to that of the target company.

Key Words: 보험효과,인수합병,재무위험,타인자본비용,Black-Scholes 옵션가격결정모형,Black-Scholes Option Pricing Model,Coinsurance Effect,Cost of Debt,Financial Risk,M&, A