Stock Price Effects of Mandatory Exchangeable Debt

We study mandatory exchangeable debt offerings. A firm that issues mandatory exchangeable debt requires bondholders to exchange their bonds for shares of the underlying firm in which the issuing firm has a stake. We find significant announcement (−3.3%) and long-run (−13%) abnormal price declines for underlying companies. The evidence is consistent with the hypothesis that mandatory exchangeable debt issuers exploit private information that they possess to issue mandatory exchangeable debt when the underlying stock is overvalued.