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://www.nber.org/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://www.nber.org/chapters/c5819 Chapter pages in book: (p. 5 - 24)

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The Growth of the “Junk” Bond Market and Its Role in Financing Takeovers
Robert A. Taggart, Jr.

1.1 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 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 the fabric of American industry” (Williams 1984). In a similar vein, twelve U.S. 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 developmknt and job creation” (Wynter 1985).
Robert A. Taggart, Jr., is a professor o finance in the School of Management, f Boston University, and