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Exchange Offers and Stock Swaps - New Evidence


  • Thomas E. Copeland
  • Won Heum Lee


Using data from the interval 1962-1984, we compare six explanations for exchange offers and swaps. Our empirical results are most consistent with the hypothesis that exchange offers are interpreted as signals about future cash flows. We find that leverage-increasing exchange offers result in decreases in systematic risk; increases in share-adjusted earnings, sales, and total assets; and that insider stock purchases increase shortly before the public announcement. Opposite results are found for leverage-decreasing exchange offers. In addition, leverage-increasing firms are one-tenth the size of leverage-decreasing firms and are more closely held. Separate cross-sectional regressions, first with the announcement day abnormal returns and then with changes in beta as dependent variables, also are consistent with the signalling hypothesis. Other than the signalling hypothesis, tax savings is the best among the remaining competing hypotheses. However, in cross-sectional tests using announcement returns as the dependent variable, the tax effect is significantly positive for a sample of 102 leverage-decreasing events. This single piece of evidence is inconsistent with the tax savings hypothesis.

Suggested Citation

  • Thomas E. Copeland & Won Heum Lee, 1991. "Exchange Offers and Stock Swaps - New Evidence," Financial Management, Financial Management Association, vol. 20(3), Fall.
  • Handle: RePEc:fma:fmanag:copeland91

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    Cited by:

    1. Kitsabunnarat-Chatjuthamard, Pattanaporn & Lung, Peter & Nishikawa, Takeshi & Rao, Ramesh P., 2010. "Leverage-reducing exchange offers and bondholder-stockholder wealth transfers: A re-evaluation," International Review of Economics & Finance, Elsevier, vol. 19(1), pages 81-94, January.
    2. Robert M. Hull & George E. Pinches, 1995. "Firm Size and the Information Content of Over-the-Counter Common Stock Offerings," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 4(1), pages 31-55, Spring.
    3. Shenoy, Catherine & Koch, Paul D., 1996. "The firm's leverage-cash flow relationship," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 307-331, February.
    4. repec:mth:ber888:v:8:y:2018:i:1:p:h:ber888:v:8:y:2018:i:1:p:212-243 is not listed on IDEAS

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