Debt-reducing exchange offers

Announcements of debt-reducing exchange offers are associated with a negati ve average stock price reaction. We address two questions: Why do firms und ertake debt-reducing exchange offers? And, what is the information conveyed by such offers? The answers are interrelated: Debt-reducing exchange offer s are undertaken by financially weak firms in an effort to stave off furthe r financial distress and, thereby, preserve value for shareholders. A succe ssfully completed exchange offer significantly reduces the likelihood that a firm will enter Chapter 11. Announcements of debt-reducing exchange offer s apparently contain two pieces of information: (1) the firm is financially weaker than would have been apparent from other publicly available informa tion, and (2) management is attempting to preserve value for shareholders. (C) 2001 Elsevier Science B.V. All rights reserved.