Bondholders-Stockholders Conflicts and the Issuance of Subsidiary Debt

I investigate the effect of subsidiary bonds issuance on the bond- and stock- value of parent firms. I document negative bond returns of 35 bps on the parent outstanding debt, in the week of the subsidiary bond issuance. I find that the likelihood of issuing subsidiary debt is positively correlated with the amount of stock repurchases in the industry of the parent companies. At the time of repurchases, parent companies have positive abnormal stock returns by 3% if they issued subsidiary debt in the last twelve months. The results are consistent with subsidiary debt allowing for a stable payout policy within groups, which benefit the parent’ shareholders