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The Impact of Preferred-for-Common Exchange Offers on Firm Value




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    • Graduate School of Business, University of Iowa and the A. B. Freeman School of Business, Tulane University, respectively. Ronald C. Lease was on the faculty at the University of Utah throughout much of this project. We would like to acknowledge the helpful comments from Sanjai Bhagat, Jim Brickley, Larry Dann, Ashok Korwar, Scott Linn, John McConnell, Wayne Mikkelson, Mike Rozeff, and Mark Weinstein. Special thanks go to Ron Masulis for his comments and for providing a list of the firms in his preferred-for-common sample. Remaining errors, of course, are our responsibility.


This paper examines the impact of capital structure changes which have no corporate tax consequences. Specifically, exchange offers involving preferred and common stock are analyzed. We find that systematic changes in firm value occur when companies announce preferred-for-common exchange offers. Consequently, we interpret our results to be consistent with a signalling hypothesis. We also find weaker evidence suggesting the existence of agency cost effects or wealth redistributions across security classes. Our findings imply that capital structure changes need not alter the tax status of the issuing firm to affect firm value.

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