The Decision to Repurchase Debt Timothy Kruse, Tom Nohel and Steven K. Todd* March 2009

Abstract

We compile a diverse sample of 208 debt tender offers executed by 189 firms during the period 1989 – 1996. On average, tender offers are wealth-creating events, with cumulative equity announcement returns of 1.47%. Tender offers financed with equity fail to add value, but those financed with asset sales generate mean cumulative equity announcement returns of 3.77%. Compared to a matched sample of non-tendering firms, the firms that tender debt have less cash, greater long-term debt and more assets. Prior to the tender event, debttendering firms have lower operating returns than their peers; they also trade at a discount. After the tender offer, assets increase, operating returns improve and the tendering firms are awarded a market premium.

JEL classification: G32 Keywords: debt tender; capital structure; covenants

Xavier University, E-mail: [email protected]; Loyola University, E-mail: [email protected]; Loyola University, E-mail: [email protected], respectively.

We thank seminar participants at the University of Michigan for helpful comments and suggestions.

The Decision to Repurchase Debt From the perspective of shareholders, debt financing has costs and benefits. On the positive side, debt financing is cheaper than equity financing, first because of the lower returns demanded by bondholders (relative to shareholders) and second because of the tax shields created by debt interest payments. Debt financing may also discipline managers from engaging in costly wealth-destroying activities, by forcing managers to service the debt. On the negative side, debt financing may increase the likelihood of bankruptcy, thus raising the costs of financial distress.

Moreover, debt financing may impose restrictions on firm

behavior that result in positive net present value projects being left on the table. Bondholders routinely protect their investments with covenants that constrain firms. The most common covenants restrict payout, asset sales, acquisitions and financial health. Myers’ static tradeoff model argues that the agency costs of financial distress and the tax-deductibility of debt financing generate an optimal capital structure. We know that debt financing generates agency costs. However, it is difficult to measure these costs. One way we can estimate the agency costs of debt is by examining debt tender offers. Firms routinely repurchase debt to circumvent restrictive covenants. Firms may find themselves unable to pursue promising investment opportunities because of restrictive debt covenants. The costs incurred in buying back debt (which include legal and advisory fees, in addition to any premium paid to debt-holders) provide a lower bound estimate on the agency costs of debt. Debt repurchases present a near perfect laboratory to study the agency costs of debt. As with share repurchases, firms have two alternative means for repurchasing debt: buying bonds on the open market as conditions warrant, or via a tender offer. We choose to

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focus on debt repurchases via tender offers. These events are likely to be more distinct, as well as larger in magnitude. Researchers have examined share repurchases and dividend payouts in great detail, yet debt repurchases have received little attention. This is surprising, because they are quite common and they tend to involve large amounts of cash. 1 Moreover, the popular press has taken notice given the flurry of debt buybacks that have been announced and/or executed during the current upheaval in fixed income markets (see Monks, 2008; Aneiro, 2009; and Hotter, 2009). This study attempts to fill that void. Our study has three primary objectives.

First, we hope to gain a thorough

understanding of why companies make tender offers for their debt. Second, we hope to enhance our understanding of the agency costs of debt. Third, we investigate whether tender offers create value for shareholders. We compile a diverse sample of 208 debt tender offers executed by 189 companies during the period 1989 – 1996. Firms identify many reasons for the tender offers but the two most common motives are debt reduction and interest expense reduction.

Our sample

includes 146 cases where the tender offer is accompanied by a consent solicitation. These cases provide a perfect laboratory to study the agency costs of debt. On average, debt tender offers are wealth-creating events, with cumulative equity announcement returns of 1.47%. Tender offers financed with equity fail to add value, but those financed with asset sales generate mean cumulative announcement returns of 3.77%. We measure the effects of financing source and covenant removal on the equity

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Nohel and Tarhan (1998) study 242 share repurchase tender offers over the period 1974 – 1991. We compile a sample of 369 tender offers on 257 dates by 235 companies over a much shorter time period, 1989 – 1996.

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announcement returns. Efforts to eliminate payout, refunding or asset sale covenants are associated with higher announcement returns. When the tender offers are financed with secondary equity sales, the announcement returns are reduced, but when primary equity provides the financing, the announcement returns are higher. The market appears to treat debt tender offers financed by secondary equity sales as back-door exchange offers that reduce leverage. Compared to a matched sample of non-tendering firms, the firms that tender debt have less cash, greater long-term debt and more assets. Prior to the tender event, debt-tendering firms have lower operating returns than their peers; they also trade at a discount. After the tender offer, assets increase, operating returns improve and the tendering firms are awarded a market premium. Though many firms cite debt reduction as the motivation for a tender offer, our posttender offer measures of liquidity and indebtedness show little improvement for the average tendering firm. However, a sub-sample of firms with tax loss carry-forwards appear to reduce leverage. This is consistent with the static tradeoff theory of capital structure. The remainder of the paper is organized as follows. Section I provides a brief review of the literature. Section II describes our data set and discusses some hypotheses we seek to test. Section III contains our main results on sample statistics, financial ratios, cumulative announcement returns and leverage changes.

Section IV concludes the paper.

I. Literature Review

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The literature on capital structure is vast. We focus on three strands of the literature that are related to our study. The first strand looks at changes in leverage; the second strand examines covenants; the third strand considers workouts. Many papers have explored the effects of equity or debt issuance and repurchase on stock prices. Other papers have looked at debt-for-equity or equity-for-debt exchange offers. Generally, the literature finds that leverage-increasing activities are associated with shareholder gains and leverage-reducing activities are associated with shareholder losses. For example, stock tender offers generate positive, significant announcement returns (Masulis, 1980; Dann, 1981). Positive announcement returns are observed in debt-for-equity exchange offers (McConnell and Schlarbaum, 1981; Masulis, 1983; Cornett and Travlos, 1989), and preferred-for-common exchange offers (Pinegar and Lease, 1986). On the other hand, negative announcement returns are observed in equity-for-debt exchange offers (Masulis, 1983; Pinegar and Lease, 1986; Cornett and Travlos, 1989). Moreover, bond call announcements are accompanied by a negative stock price reaction when leverage is being reduced (King and Mauer, 2000). When it comes to debt financing, firms have a choice: bank debt or public debt. Bank debt can be value-enhancing relative to public debt because it increases monitoring and places greater restrictions on managerial behavior (Grossman and Hart, 1982; Fama, 1985; Jensen, 1986; James, 1987; Berlin and Loeys, 1988; and Diamond, 1991.) Banks may reduce the agency costs associated with lending by screening borrowers, threatening to cut off credit and renewing loans (Rajan, 1992). On the other hand, greater contractual restrictions in bank debt can be value-reducing. Tighter covenants and shorter maturities may prevent managers from investing in positive-NPV projects (Smith and Warner, 1979; Perry and Taggart, 1988;

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Barclay, Smith and Watts, 1995.)

Banks retain bargaining power over the borrowers’

profits. Firms may then prefer credit from arms-length sources (Rajan, 1992). Bondholders know that wealth transfers from bondholders to stockholders are possible. These transfers can reduce firm value. Rational bondholders impose covenants on the firm. Covenants may increase firm value (Smith and Warner, 1979; Smith, 1993).

With

covenants, bondholders pay a higher price for new debt (the issuing firm enjoys greater funds) and monitoring costs borne by bondholders are reduced. Covenants are contractual devices that increase a lender’s incentives to monitor by making the effective maturity and priority of loans contingent on the lender’s monitoring (Rajan and Winton, 1995). However, covenants may constrain firms severely. During financial distress, debt covenants can be stronger disciplinary mechanisms than requirements to meet cash interest payments (DeAngelo, DeAngelo and Wruck, 2002). Bankruptcy is costly. Restructuring debt privately is generally better for shareholders (Gilson, John and Lang, 1990). However, public workouts may be thwarted by a holdout problem (Jensen, 1989).

The holdout problem occurs when there are two classes of

bondholders, one who must tender and bear the cost of the workout, and another who doesn’t tender and receives the benefit. The simplest analogy is two classes of debt, senior and junior. Financially distressed firms routinely implement workouts via tender and exchange offers. Bondholders are susceptible to coercion for two main reasons. First, the corporate bond market is highly illiquid, leaving open the possibility of considerable mis-pricing. Second, bond ownership is often diffuse (Coffee and Klein, 1991). Coercion may not be detrimental to bondholders, and may benefit security holders by increasing the likelihood of a

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less costly, out-of-court restructuring (Chatterjee, Dhillon and Ramirez, 1995). In fact, bondholder returns around the announcement of structurally coercive consent solicitations are significantly positive, indicating that firms cannot, or do not, exploit the coercive nature of their solicitation (Kahan and Tuckman, 1993). To date, there has been no comprehensive study of debt repurchases. Specialized studies include Wingler and Jud (1990) who consider a sample of debt buybacks by utility companies in the mid 1980s; Kahan and Tuckman (1993) who examine consent solicitations, and use a sub-sample of 24 debt tender offers; Chatterjee, Dhillon and Ramirez (1995) who examine distressed high-yield restructurings, with a sub-sample of 16 tender offers; and Mann and Powers (2003) who examine a narrow time period (1997 – 2001) and focus entirely on bondholders. Our study attempts to fill the gap.

II. Data and Hypotheses A.

Data

We compile a sample of debt tender offers for the period 1988 – 1996. We chose this period because it spans a full cycle of interest rates. This is important because firms’ motives in pursuing tender offers may differ in periods of rising and falling interest rates. Our sample period includes both a recession (1990 – 1991) and an expansion (mid 1990s). It also includes a period of tight monetary policy (1994), when the Federal Reserve was trying to reign in an overheating economy. We search the Wall Street Journal Index and the Dow Jones Newswire service (via Factiva) for firms that engage in debt tender offers during our sample period.

We treat

tender offers for multiple debt issues as one event. Our initial sample includes 270 debt

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repurchase tender offers. confounding events.

We eliminate exchange offers and debt tender offers with

We also eliminate private firms and firms for which there is no

Compustat or CRSP data. Our final sample contains 208 distinct debt tender events.

B.

Discussion

Because debt repurchase is a leverage-decreasing event, the market’s reaction to debt tender offers should be negative. However, unlike leverage-decreasing exchange offers, debt tender offers require the expenditure of cash. As a result, the share price reaction may depend on several factors. These factors include the costs of binding protective covenants and financial distress, the firm’s capital structure, the source of financing, and tax effects. By repurchasing debt with binding protective covenants, firms may eliminate restrictions that prevent them from pursuing value-enhancing activities. The net result may be an increase in share value. Of course, bondholders may attempt to capture all the rents of these value-enhancing activities.

If the bondholders successfully hold-up the firm, the

premium paid to repurchase the debt will exactly offset the benefit associated with the removal of the covenants, resulting in no change in share value. However, since bondholders do not have access to the same information as managers, this is unlikely. Firms that are financially distressed may be able to repurchase their debt at a discount, thus saving on restructuring/bankruptcy costs. Bonds of financially distressed companies are highly illiquid, leaving open the possibility of considerable mis-pricing. Bond ownership is often diffuse. If firms are able to coerce bondholders into selling their debt at a discount to true value, then shareholders may gain. This is simply a wealth transfer from bondholders to stockholders. However, it is entirely possible that bondholders don’t lose in this transaction,

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if via their informal re-negotiation, they forego the costs that they would have been charged in the bankruptcy process. Both debt and equity have costs and benefits that need to be balanced against each other. If a firm has drifted towards a capital structure with too much debt, a tender offer for debt will move the firm closer to its optimal capital structure. In this case, the reaction to a debt buyback should be most positive (least negative) for firms that are the most overlevered. The source of funds for a debt tender offer might be cash on hand, newly borrowed cash (bank loans or public debt), equity, or the proceeds from an asset sale. The reaction to a debt buyback likely depends on which of these sources provided the financing for the transaction. One benefit of debt is that its associated interest is tax deductible. However, there are several reasons why a firm may not need interest tax deductions. For example, a firm may not have taxable earnings in a given year. Additionally, the firm may obtain other types of tax deductions such as the amortization of goodwill or increased depreciation expense resulting from acquisitions or investments. Perhaps the decision to repurchase debt is driven by changes in the marginal tax rate. If the benefits from tax shields fall, less leverage is needed. In cases where the marginal tax rate falls, we might observe a more positive (less negative) reaction to a debt repurchase. Of course, this assumes that leverage was optimal prior to the shift in the marginal tax rate.

III. Results A.

Sample Characteristics

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Table I reports descriptive statistics for 208 tender offers executed by 189 companies during the sample period 1989 – 1996. Panel A describes the type of offer; Panel B reports the stated reason for the tender offer; Panel C examines consent solicitations; Panel D lists the source of funds for the tender offer. More than 70% of the tender offers are fixed price offers. Fixed spread auctions are much less common, and Dutch auctions are quite rare. The two most commonly cited reasons for the tender offer are debt reduction (25.5% of the sample) and interest expense reduction (24.5%). Covenant relaxation is cited as the reason for the tender offer in 19.7% of our events. Only seven issuers (3.4% of our sample) state they are tendering debt to avoid default. More than 60% of the tender offers coincide with consent solicitations. Most of the time, issuers do not state which covenant they are seeking to relax; when a specific covenant is cited, it is most likely to be a refunding covenant (14.1% of all consent solicitations). Nearly 40% of all debt tender offers use public debt financing to cover the costs of the tender. Less common sources of financing include cash, asset sales, bank debt and common equity, with frequencies of 19.7%, 14.9%, 13.9%, and 13.9% respectively. In 17 debt tender offers (8.2% of our sample), the firm is going public and using the proceeds from the IPO to pay for the debt tender offer. Table 2 provides detailed information on the tender offers. For the average (median) offer, the issuer seeks to retire 89.9% (100%) of a $287.0 million ($115.0 million) outstanding debt issue. Based on book values in the year prior to the debt tender offer, the average (median) offer represents 26.6% (17.9%) of assets and 80.2% (40.5%) of debt. These are not negligible cash events. Compared to share tender offers, which usually target

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between 15% and 20% of all outstanding shares (-- see Nohel and Tarhan, 1998), debt tender offers are quite large. In Table 3, we examine the annual break-down of debt tender offers. We see that there are offers in every year, with 1996 generating the most offers (28.4% of the sample). Over the sample period, 10-year Treasury note yields vary from a low of 5.96% in 1993 to a high of 8.48% in 1990. Spreads between AAA corporate issues and Treasuries vary from a low of 73 basis points in 1991 to 137 basis points in 1993. Spreads between BAA and AAA corporate issues vary from a low of 74 basis points in 1993 to 96 basis points in 1990. Table 4 examines the industry break-down of the 208 debt tender offers, based on the Fama and French (1997) industry classifications. For 16 observations, no SIC code is available. For the remaining debt tender offers, the industries with the highest concentration are retail, healthcare and utilities representing 9.4%, 7.8% and 7.8% of our sample respectively. No single industry dominates the table.

B.

Financial Ratios

We continue our analysis by examining financial ratios before and after the debt tender offers. Recall that Panel B of Table 1 listed debt reduction as the motivation cited by issuers for more than one quarter of all the debt tender offers. Is this just a smokescreen? We examine this issue in Tables 5 and 6. Here we compare debt-tendering firms to similar firms that do not tender, matched by SIC code and operating performance in the year prior to the debt tender events. Table 5 reports various financial ratios for the tendering firms and a sample of matching firms in the years leading up and following the debt tender events, Year -1, Year 0

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and Year +1. We see that compared to the control matches, firms that tender debt have higher median total assets, before, during and after the tender events. The median difference between the total assets of tendering-firms and non-tendering firms is about $550 million. Compared to the control matches, firms that tender debt have lower mean and median current ratios and cash-to-total asset ratios. The differences are statistically significant in the years before and after the tender event, as well as the year of the tender event; all p-values are less than 1%. Compared to their control matches, tendering firms also have higher longterm debt ratios. The interest coverage ratios for tendering firms are significantly lower than the coverage ratios for the control sample. After the debt tender event, coverage ratios improve, with the median interest coverage ratio for tendering firms rising from 2.66 in the year prior to the tender event to 3.50 in the year after the tender event. These ratios are consistent with a debt rating of BB, slightly below investment grade. Table 5 also indicates that, compared to the control sample, debt-tendering firms have lower operating returns and lower marketto-book ratios prior to the tender event. In Table 6 we look at changes in the financial ratios between Years -1, and +1, the years prior to and after the debt tender event. Here we see that for the debt tender firms, mean total assets increases, but the current ratio falls. The mean long-term debt ratio falls slightly, as does the ratio of cash to total assets. On the other hand, the mean market-to-book ratio rises and operating returns increase. However, when we compare these mean changes to the control sample, the only mean changes that are statistically significant are total assets (with a p-value less than 1%) and operating returns (with a p-value of 10%). Focusing on median values, the debt tender firms see an increase in total assets, an increase in the market-

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to-book ratio and a decline in the ratio of cash-to-total assets. Compared to the control sample, the only median change that is statistically significant is the increase in the marketto-book ratio (with a p-value of 5%). In summary, Tables 5 and 6 indicate that, compared to the control sample, firms that tender debt have more assets but also greater long-term debt. Debt-tendering firms have less cash and are more financially constrained. Prior to the tender event, debt-tendering firms have lower operating returns than their peers; they also trade at a discount. After the tender offer, assets increase, operating returns improve and the tendering firms are awarded a market premium.

C.

Cumulative Announcement Returns (CARs)

We continue our analysis by examining the three-day equity announcement returns for firms that tender debt. Table 7 reports CARs for the complete sample and for sub-samples of the data. The mean CAR is 1.47%; the median CAR is 0.58%. Both values are statistically significant with p-values less than 1%. We next investigate whether there are differences in the CARs based on the financing used to pay for the tender offers. When equity or a mix of debt and equity are used, the CARs are statistically no different from zero. When debt is used, but equity is not, the mean CAR is 0.95% and is marginally significant. When neither debt nor equity are used, the mean (median) CARs are 2.46% (1.02%), both statistically significant with p-values less than 1%. Focusing on those tender offers financed with neither debt nor equity, the largest returns occur when firms sell assets to finance the debt tenders. There are 19 of these events

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and the mean (median) CARs are 3.77% (1.99%), both statistically significant. However, when cash on hand is used, the CARs are statistically no different from zero. We continue our analysis with a cross-sectional multivariate analysis of the announcement returns. These results are reported in Table 8. Here we introduce a number of dummy variables to describe the sources of financing for the debt tender offers. EQUITY takes on a value of 1 when the financing source is secondary equity; otherwise it has a value of 0. IPO, ASALE, CASH, BANK, DEBT, PREF and NOSOURCE are similarly defined for the following financing sources: primary equity, asset sales, cash, bank loans, public debt, preferred equity and unknown. We use a different set of dummy variables to describe the covenants that are being relaxed.

ALLCOV takes on a value of 1 when all the covenants are being removed;

otherwise it has a value of 0.

PAYCOV, REFCOV, ASALECOV, MERGECOV and

NOCOV are similarly defined for the following covenants: payout, refunding, asset sales, mergers and no covenants We find that with respect to financing sources, secondary equity has a negative effect and primary equity has a positive effect on announcement returns. Perhaps, the market treats debt tender offers financed by secondary equity sales as back-door exchange offers that reduce leverage. With respect to covenant changes, the removal of payment, refunding and asset sale covenants have a positive effect on announcement returns. Table 8 also shows that the announcement returns are negatively related to firm size, perhaps a residual small firm effect.

D.

Leverage Changes

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We complete our analysis by examining leverage changes in Table 9.

In these

regressions, the dependent variable is the change in (book-value) leverage between Year -1 and Year +1.

The independent variables include three dummy variables:

MERGER,

TAXLOSS and IPO. MERGER takes on the value 1 when the debt-tendering firm is involved in a takeover/merger; otherwise MERGER has a value of 0. TAXLOSS takes on the value of 1 when the debt-tendering firm has tax-loss carry-forwards in either year +1 or +2; otherwise TAXLOSS has a value of 0. IPO takes on the value of 1 when the debttendering firm is going public; otherwise IPO has a value of 0. Table 9 shows us that changes in leverage are positively related to a merger event and negatively related to an IPO event or tax loss carry-forward opportunities.

These observed leverage changes are

consistent with the static tradeoff theory of capital structure.

IV. Summary and Conclusions Because debt repurchase is a leverage-decreasing event, the market’s reaction to debt tender offers should be negative. However, unlike leverage-decreasing exchange offers, debt tender offers require the expenditure of cash. As a result, the share price reaction may depend on several factors. These factors include the costs of binding protective covenants and financial distress, the firm’s capital structure, the source of financing, and tax effects. We compile a diverse sample of 208 debt tender offers executed by 189 companies during the period 1989 – 1996. Firms identify many reasons for the tender offers but the two most common motives are debt reduction and interest expense reduction.

Covenant

relaxation is cited as the reason for the tender offer in 20% of our events. Many of the tendering firms simultaneously seek consent solicitations.

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Financing for the debt tender offers varies. Many of the debt repurchases are financed with public debt. Less common sources of financing include cash, asset sales, bank debt and common equity. Compared to a matched sample of non-tendering firms, the firms that tender debt have less cash, greater long-term debt and more assets. Prior to the tender event, debt-tendering firms have lower operating returns than their peers; they also trade at a discount. After the tender offer, assets increase, operating returns improve and the tendering firms are awarded a market premium. On average, debt tender offers are wealth-creating events, with cumulative equity announcement returns of 1.47%. Tender offers financed with equity fail to add value, but those financed with asset sales generate mean cumulative equity announcement returns of 3.77%. Though many firms cite debt reduction as the motivation for a tender offer, our posttender offer measures of liquidity and indebtedness show little improvement for the average tendering firm. However, a sub-sample of firms with tax loss carry-forwards appear to reduce leverage. This is consistent with the static tradeoff theory of capital structure.

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Table 1 Sample Description Descriptive statistics of 208 debt tender offer events executed by 189 companies during the period 1989 – 1996.

Panel A – Type of Offer Fixed Price Fixed Spread Dutch Auction No Information

N 149 39 8 12

% of sample 71.6 18.8 3.8 5.8

N 7 19 3 53 51 18 16 41 5

% of sample 3.4 9.1 1.4 25.5 24.5 8.7 7.7 19.7 2.4

24 19 25

11.6 9.2 12.0

Panel B – Reason for Tender Avoid default Restructure Debt/Distress Extend Maturity Reduce Debt Reduce Interest Expense Refinancing/Refunding Financial Flexibility Covenants Required Merger related – tendering firm is: Target Acquirer Not Given

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Panel C – Consent Solicitations Number with Consent Solicitations Covenant to be Relaxed Refund New Debt Issue Priority Easement Investment Distress Asset Sale Merger Repurchase Dividend Various/All Not Given

N 128

% of sample 61.5

N 18 2 1 3 3 6 5 4 2 15 69

% of consents 14.1 1.6 0.8 2.3 2.3 4.7 3.9 3.1 1.6 11.7 56.3

N 41 83 29 7 29 9 17 31 48

% of sample 19.7 39.9 13.9 3.4 13.9 4.3 8.2 14.9 23.1

Panel D – Source of Funds Cash Debt Bank/Credit Line Exchange Offer Common Equity Preferred Equity Initial Public Offering Asset Sale Not Given

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Table 2 Details of the debt tender offers Value and relative value of the 208 debt tender offer events executed by 189 companies during the period 1989 – 1996. $-Value of Offers

Mean

Amount outstanding ($millions)

Median

287.0

115.0

Portion of issue sought (%)

89.9

100.0

Portion of issue received (%)

85.3

95.4

Relative Value of Offers

Mean

Median

As a percentage of Assets in year -1

26.6%

17.9%

As a percentage of Debt in year -1

80.2%

40.5%

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Table 3 Annual break-down of debt tender offers Yields, spreads and annual break-down of the 208 debt tender offer events executed by 189 companies during the period 1989 – 1996.

Year # 1989 14 1990 18 1991 26 1992 27 1993 21 1994 14 1995 29 1996 59 Total 208

% 6.7 8.7 12.5 13.0 10.1 6.7 13.9 28.4 100.0

10 Year Treasuries 8.28 8.48 8.28 7.26 5.96 7.10 6.17 6.91

Yields (%) on: AAA BAA Corporate Corporate 9.10 10.03 9.26 10.22 9.01 9.96 8.22 9.05 7.33 8.07 7.97 8.65 7.30 7.90 7.71 8.40

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Spreads (%) AAA less BAA 10 Year less AAA 0.82 0.93 0.78 0.96 0.73 0.95 0.96 0.83 1.37 0.74 0.87 0.68 1.13 0.60 0.80 0.69

Table 4 Industry break-down of debt tender offers Industry break-down of the 208 debt tender offer events executed by 189 companies during the period 1989 – 1996, based on Fama and French (1997) industry classifications.

Industry # Retail 18 Healthcare 15 Utilities 15 Business Services 13 Telecommunications 12 Business Supplies 10 Petroleum and Natural Gas 10 Steel Works, Etc. 9 Transportation 9 Chemicals 7 Restaurants, Hotel, Motel 7 Banking 6 Consumer Goods 6 Machinery 6 Construction Materials 4 Personal Services 4 Rubber and Plastic Products 4 Wholesale 4 Alcoholic Beverages 3 Entertainment 3 Food Products 3 Miscellaneous 3 Printing and Publishing 3 Real Estate 3 Automobiles and Trucks 2 Electronic Equipment 2 Medical Equipment 2 Trading 2 Aircraft 1 Computers 1 Measuring/Control Equip. 1 Precious Metals 1 Recreational Products 1 Shipping Containers 1 Textiles 1 Total 192*

% 9.4 7.8 7.8 6.8 6.3 5.2 5.2 4.7 4.7 3.7 3.7 3.1 3.1 3.1 2.1 2.1 2.1 2.1 1.6 1.6 1.6 1.6 1.6 1.6 1.0 1.0 1.0 1.0 0.5 0.5 0.5 0.5 0.5 0.5 0.5 100.0

* Note: for 16 observations, no SIC code was available

25

Table 5 Financial information of debt tendering firms Based on 192 firms for which financial information is available. The test statistics report results for tests of the adjusted figures being different from zero; *, **, and *** indicate significance at the 0.10, 0.05 and 0.01 levels, respectively. Entry format All sample firms with Compustat data Sample firms with control matches (unadjusted data) Adjusted figures: Entry = sample firm – control firm

Total assets (actuals) (adjusted)

Mean 4313.8 3706.2 1275.8

Year -1 Median 965.4 1116.73 511.3***

n 174 139

Mean 4332.6 4207.9 1477.5

Year 0 Median 1238.1 1300.6 571.9***

n 167 133

Mean 4411.8 4179.4 1099.9

Year 1 Median 1320.5 1441.0 598.4***

n 159 125

Current ratio

1.75 1.72 -0.99***

1.44 158 1.42 129 -0.17***

1.68 1.63 -1.12***

1.37 150 1.36 122 -0.37***

1.61 1.58 -1.01***

1.43 143 1.42 114 -0.29***

Cash to total assets

0.07 0.07 -0.04***

0.03 173 0.03 139 -0.001**

0.07 0.07 -0.04***

0.03 166 0.03 133 -0.01***

0.06 0.06 -0.04***

0.02 159 0.02 125 -0.01***

0.41 0.40 0.19***

0.36 175 0.35 139 0.15***

0.42 0.40 0.17***

0.37 167 0.34 133 0.11***

0.41 0.40 0.16***

0.35 159 0.34 125 0.12***

Long-term debt ratio

Market-to-book

1.39 1.40 -0.31**

1.19 1.20 -0.01

135 128

1.53 1.46 -0.20

1.26 1.24 0.04

145 126

Operating return

0.122 0.120 -0.008

0.130 0.128 -0.001

168 139

0.127 0.124 -0.004

0.124 0.123 -0.004

163 133

Interest coverage

n.a. n.a. n.a.

2.47 168 2.66 139 -1.22***

n.a. n.a. n.a.

26

2.74 163 3.07 125 -1.88***

1.60 1.57 -0.12 0.132 0.133 0.005 n.a.. n.a. n.a.

1.25 1.24 0.04

144 122

0.127 0.127 0.000

157 125

3.15 156 3.50 124 -1.13***

Table 6 Changes in Financial Variables from year -1 to year 1 Based on approx 135 firms for which financial information is available and control firms have been identified. The test statistics report results for tests of equality of means and medians, respectively. The test statistics report results for tests of the adjusted figures being different from zero; *, **, and *** indicate significance at the 0.10, 0.05 and 0.01 levels, respectively. Entry format Sample firms with control matches (unadjusted data) Adjusted figures: Entry = sample firm – control firm n 125

Mean 608.3 166.0***

First Quartile -26.1 -247.5

Current ratio

114

-0.14 -0.11

-0.50 -0.62

-0.07 -0.112

0.22 0.44

Cash to total assets

125

-0.01 -0.02

-0.03 -0.07

-0.003** -0.005

0.01 0.03

Long-term debt ratio

125

-0.001 -0.02

-0.07 -0.13

-0.02 -0.01

0.05 0.08

Market-to-book

115

0.14 0.18

-0.07 -0.11

0.04 0.05**

0.21 0.41

Operating return

125

0.009 0.014*

-0.024 -0.035

-0.001 0.002

0.024 0.036

Interest coverage

124

n.a. n.a.

-0.83 -2.38

0.24 0.40

1.56 4.70

Total assets

(actuals) (adjusted)

27

Median 134.5*** -2.3

Third Quartile 648.0 507.7

Table 7 Three day announcement effects (CARs) Equity issues can be common, preferred, or IPO. Some firms doing debt or equity issue also might have an asset sale. *, **, and *** indicate significance at the 0.10, 0.05 and 0.01 levels, respectively.; p-values in parentheses. n 160

mean (%) 1.47*** (