Information Effects Associated with Debt-for-Equity and Equity-for-Debt Exchange Offers




    Search for more papers by this author
    • Department of Finance, Southern Methodist University and Department of Finance, Boston College, respectively. An earlier version of this paper was entitled “Information Effects of Capital Structure Changes on Shareholders' Wealth: Some Estimates Based on Debt-for-Equity and Equity-for-Debt Exchange Offers.” The helpful comments of George Aragon, Andrew Chalk, Andrew Chen, Tom Downs, George Hempel, Katherine Hevert, Ron Masulis, Robyn McLaughlin, Nikolaos Milonas, Chris Muscarella, George Papaioannou, John Peavy, John G. Preston, Neil Sicherman, Elizabeth Strock, Hassan Tehranian, Nikhil Varaiya, Michael Vetsuypens, and Jerry Viscione are gratefully acknowledged. The paper benefitted greatly from remarks and suggestions from an anonymous Associate Editor, an anonymous referee, and the editor, René Stulz. The research assistance of Bill Chrisemer and Doug Bullfinch is greatly appreciated. Millon Cornett also acknowledges financial support from the Center for the Study of Financial Institutions and Markets, and Travlos acknowledges financial support from the Boston College Summer Research Grant Program.


This study investigates the information effect caused by a firm's change in capital structure via debt-for-equity and equity-for-debt exchange offers. The evidence suggests that the former transactions lead to abnormal stock price increases, while the latter lead to abnormal stock price decreases. In addition, findings based on analysis of bond returns and cross-sectional regressions do not lend support to the wealth-transfer- and tax-effect hypotheses, but they are consistent with the information-effect hypothesis.