TAILIEUCHUNG - Mergers and Acquisitions

“Junk” bonds, as they are popularly called, or “high-yield’’ bonds, as they are termed by those wishing to avoid pejorative connotations, are simply bonds that are either rated below investment grade or unrated altogether.’ Fueled by the introduction of newly issued junk bonds in 1977, this segment of the bond market has grown rapidly in recent years and now accounts for more than 15 percent of public corporate bonds outstanding. However, the growth of junk bond financing, particularly in hostile takeover situations, has been bitterly denounced. For example, Martin Lipton, a merger specialist with the firm of Wachtell, Lipton, Rosen, and Katz, has argued that junk bond financing threatens “the destruction of. | This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title Mergers and Acquisitions Volume Author Editor Alan J. Auerbach ed. Volume Publisher University of Chicago Press Volume ISBN 0-226-03209-4 Volume URL http books auer87-1 Publication Date 1987 Chapter Title The Growth of the Junk Bond Market and Its Role in Financing Takeovers Chapter Author Robert A. Taggart Jr. Chapter URL http chapters c5819 Chapter pages in book p. 5 - 24 1 The Growth of the Junk Bond Market and Its Role in Financing Takeovers Robert A. Taggart Jr. Introduction Junk bonds as they are popularly called or high-yield bonds as they are termed by those wishing to avoid pejorative connotations are simply bonds that are either rated below investment grade or unrated Fueled by the introduction of newly issued junk bonds in 1977 this segment of the bond market has grown rapidly in recent years and now accounts for more than 15 percent of public corporate bonds outstanding. However the growth of junk bond financing particularly in hostile takeover situations has been bitterly denounced. For example Martin Lipton a merger specialist with the firm of Wachtell Lipton Rosen and Katz has argued that junk bond financing threatens the destruction of the fabric of American industry Williams 1984 . In a similar vein twelve . senators signed a letter in support of Federal Reserve restrictions on junk bond-financed takeovers that stated By substituting debt for equity on the balance sheets of the nation s corporations junk bond financing drains financial resources from productive uses such as economic development and job creation Wynter 1985 . Robert A. Taggart Jr. is a professor of finance in the School of Management Boston University and a research associate of the National Bureau of Economic Research. 5 6 Robert A. Taggart Jr. Why did junk bond financing arise and how important is its influence in the capital

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