We investigate the market's reaction to original-issue deep discount (OID) bonds, which are issued at prices well below par and with coupons set below the market rate. Until July 1982 OID debt offered large tax advantages. Before that date stock-price responses to announcements of OID debt are significantly positive, in contrast to the negative, albeit insignificant, responses associated with par debt announcements. No stock-price gains are observed for OID debt issued after the tax advantages are removed. We conclude that in 1981–82 opportunities provided by financial innovation offset the negative information effects typically associated with debt-financing announcements.

Exchangeable debt is convertible into the common stock of a target firm in which the issuing firm has an ownership position. It signifies a potential change in the issuing firm's asset composition through the divestiture of the ownership stake in the target firm. We find that announcements of exchangeable debt offers are associated with insignificant abnormal returns for the shareholders of issuing firms. The target firm's share price declines, however, when an exchangeable debt offer is announced. This result is consistent with the offer's potential to reduce the ownership concentration of the target firm's common stock.