Equity for Debt Exchanges and Stockholder Wealth

Equity for debt exchanges have recently experienced a surge in popularity. Before 1981, such transactions occurred occasionally, but because of a change in the tax laws, these transactions have since taken on new prominence. The financial press suggests that there are two main reasons for undertaking an exchange: (1) to increase the current period earnings per share and (2) to improve the balance sheet by reducing debt.' The technique has been used by a broad crosssection of firms, and in certain cases, the earnings generated by the exchange have represented most of the earnings reported for the period.' These transactions are not without cost, since the firm may be replacing a low cost source of funds with equity, and