The Effects of Capital Structure Change on Security Prices: A Study of Exchange Offers

Abstract

This study examines the impact of approximately pure capital structure change announcements on security prices (specifically on common stock, straight preferred stock, convertible preferred stock, straight debt and convertible debt). Statistically significant price adjustments in firms’ common stock, preferred stock and debt related to these announcements are documented and alternative causes for these price changes are examined. The evidence is consistent with both corporate, tax and wealth redistribution effects. There is also evidence that firms make decisions which do not maximize stockholder wealth. In addition, a new approach to testing the significance of public announcements on security returns is presented.

Keywords: exchange offer, capital structure change, common stock, preferred stock, debt, announcement returns, event study methodology, protective covenants, wealth expropriation, recapitalization

JEL Classification: G32, G34, G14