How large are the coinsurance benefits of mergers?

2016-10-20Using a structural model, I estimate the value gain from coinsurance for a sample of mergers. For most mergers, estimated gains from coinsurance are small—smaller than the counterfactual gains if firms were to merge randomly——suggesting that coinsurance is not the primary motivation for most mergers. Coinsurance from diversifying mergers is also small, comparable to related mergers. Even though coinsurance is small compared to combined target and acquirer firm value, it is not small when compared to deal size, or target size. For a quarter of the sample, targets are at significant risk of default without the merger; their default risk reduces significantly due to the merger; coinsurance is thus substantial for mergers involving highly levered targets. Coinsurance is also substantial for mergers between small firms, or for mergers between firms of similar size. The cumulative abnormal return around merger announcement increases 0.89% for every 1% estimated value gain from coinsurance, suggesting that stockholders benefit from coinsurance