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Equity‐for‐Debt Exchange Offers: Theory, Practice, and Evidence
Author(s) -
Born Jeffery A.,
McWilliams Victoria B.
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00425.x
Subject(s) - free cash flow , equity (law) , leverage (statistics) , cash flow , monetary economics , debt , shareholder , economics , financial economics , business , finance , corporate governance , mathematics , statistics , political science , law
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, shareholder 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 hypotheses. We infer that EOs are motivated by sinking fund considerations, rather than signaling or compensation motives.