Equity-for-Debt Exchange Offers: Theory, Practice, and Evidence

Jeffrey A Born and Victoria B McWilliams

The Financial Review, 1997, vol. 32, issue 2, 273-91

Abstract: Studies of investor responses to exchange offer (EO) announcements find a positive relation between abnormal returns and the proposed change in leverage: a result consistent with the performance signaling hypothesis. In this study of equity-for-debt EO announcements, share-holder wealth declines and the relation between Tobin's Q and announcement effects is consistent with the free cash flow hypothesis. There is no pattern of contemporaneous and subsequent performance of EO firms that systematically supports the signaling, income smoothing, or free cash flow hypothesis. We infer that EOs are motivated by sinking fund considerations, rather than signaling or compensation motives. Copyright 1997 by MIT Press.

Date: 1997
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