Does Subsidiary Debt Expropriate Wealth from the Bondholders?

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