Financial analysis demonstrates divergent stock price movements following exchange offers in corporate firms, suggesting that capital structure shifts convey critical firm valuation signals.
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.
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Cornett et al. (1989) studied this question.
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