Leverage-reducing exchange offers and bondholder-stockholder wealth transfers: A re-evaluation

This paper re-examines the intersecurity wealth effects of leverage-reducing exchange offer (LREO) announcements. We show that previous studies may have been confounded by not distinguishing between two types of LREOs - swaps and exchange offers - and by the limited availability of bond data to properly test the wealth transfer effect. Contrary to extant research, we find evidence supportive of the wealth transfer hypothesis in the case of exchange offers but not swap offers. More detailed analysis of LREO exchange offers reveals a systematic relationship between bond returns and certain attributes that capture managerial inclination to accede to bondholder interests, consistent with a wealth transfer effect.