Building on the work of Das and Sundaram (2007), we develop a widely applicable model to price securities subject to interest rate, equity, and default risks and use it to price exchangeable bonds. The extension features a trivariate recombining lattice instead of the original model’s bivariate recombining lattice. We also show how to estimate some critical non-observable inputs to implement the model by using current market data so that the model’s prices reflect current market information. We test the model on a sample of exchangeable bonds to determine the model’s empirical performance. Besides exchangeable bonds, we can also use the model to price securities such as reverse exchangeable bonds, bonds exchangeable to indexes, and bonds exchangeable to commodities.

We model the reorganization decision of distressed firms. One of the novel features of our paper is that we examine the asset and liability side restructuring decisions jointly to resolve financial distress. Secondly, we model several institutional features of coping with financial distress such as debtor-in-possession financing, prepackaged bankruptcies, and asset sales. In our model, asset liquidity, indirect costs of financial distress, and the option value of equity are the determinants of the choice between Chapter 11 reorganizations and workouts. The model develops several testable predictions, some of which are novel and others of which are able to explain previously documented empirical results.

We find that PIPE issues that do not provide any protections to investors convey positive information about the firm and result in positive announcement period returns. However, PIPE issues that provide protections do not convey any new information about the firm and hence do not result in significant positive or negative announcement period returns. PIPE issuers that offer no protections to investors outperform their matched portfolios for up to 9 months after the issue. PIPE issuers that offer protections underperform their matched portfolios for 18 to 36 months after the issue.