The stock market reaction to bond refinancing issues with and without senior debt

Abstract

Using a sample of 3228 bond issues of U.S. publicly traded companies from 1990 to 2021, we find a statistically significant negative stock market reaction surrounding the announcements of debt issues aimed at refinancing outstanding debt when compared to debt issues for other purposes. The results are not driven by public debt being used to refinance “inside” debt, such as bank loans. This finding aligns with signaling theory, which suggests that replacing existing debt with new debt may indicate unfavorable conditions: difficulty servicing current debt obligations with existing resources or a lack of future growth opportunities. These negative market reactions are mitigated, however, when firms use less risky senior debt to refinance existing debt. Senior notes serve as a strategic move by firms to counter the negative market perception associated with debt refinancing issues. The findings are particularly more pronounced for the decades after 1999, albeit with a reduced magnitude in the 2010s, suggesting that the Global Financial Crisis in the 2000s made markets more sensitive to negative signals related to public debt refinancing. The main findings are robust to potential biases brought about by measurement errors, simultaneity, and endogeneity.