Stock Returns before and After Calls of Convertible Bonds (original) (raw)
Related papers
Convertible debt--a dynamic test of call policy
RePEc: Research Papers in Economics, 1992
This paper examines the call policy of convertible bonds dynamically through time. That is, it examines daily whether a firm should call its convertible debt and measures any delay. Starting with Ingersoll (1977b), the academic literature on convertible calls has sought to explain why convertible bonds are called late. The findings here demonstrate that there is no call delay phenomenon to explain. Most bonds, given their call protection, are called as soon possible. For the few firms that do not, there are significant cash flow advantages to delaying. The median call delay period for all convertible bonds is quite short: slightly less than four months after the conversion value first exceeds the call price. If, in addition, firms want the conversion value to exceed the call price by a safety premium to assure it will still exceed the call price at the end of the normal 30 day call notice period, the median call period is less than a month.
Risk Changes around Calls of Convertible Bonds
Financial Review, 2010
We examine changes in equity and asset betas around convertible bond calls and report two major findings. First, calling firms exhibit an increase in asset betas following the call. We argue that the finding is consistent with the implications of the sequential financing theory but not of the backdoor equity financing theory. Second, abnormal returns at call announcements are negative only for the subsample of firms that also exhibit an increase in equity beta. We conclude that risk changes help explain the market reaction to convertible bond calls.
Market Efficiency and Returns from Convertible Bond Hedging and Arbitrage Strategies
The Journal of Alternative Investments, 2009
Note: This exhibit reports the average buy-and-hold returns of buying one convertible bond at the issuance date. The first column indicates the holding period. The second column reports the returns of the pure long CBs portfolio; t-statistics for the returns are shown in Column 3. Column 4 (5) is the number of positive (negative) returns; Column 6 is the total number of observations at the end of X months after the issuance date. Column 7 is the significance level of the t-statistics in Column 3: 1, 2, and 3 denote statistical significance at the 10%, 5%, and 1% levels in a two-tail test, respectively.
Call Timing of Callable Non-Convertible Bonds: A Survival Analysis
Journal of Reviews on Global Economics, 2018
: We empirically analyze the factors affecting corporate decisions to call non-convertible bonds using survival analysis. The results show that firms tend to defer calling non-convertible bonds in order to mitigate agency costs of debt (including under-investment and risk-shift); that calling is significantly more intense if positive information is revealed; that non-refundability clauses are binding on call decisions; that firms are more likely to redeem bonds to refund if market interest rates fall dramatically; and that this interest effect is stronger as the transaction costs of refunding decrease. Also, this paper shows that call intensity monotonically decreases after call protection periods expire
New Evidence on the Market Impact of Convertible Bond Issues in the U.S
SSRN Electronic Journal, 2000
This study provides new evidence on the market impact of new issues of convertible bonds of U.S. listed firms. We examine on the market reaction surrounding the announcement dates and the issue dates of convertible bonds. The evidence suggests that firms experience negative abnormal returns around the announcement of new issues of convertible bonds. Abnormal returns are found to be a function of firm market value, price-to-book ratio, issue size, as well as the state of the overall market. Simulations using convertible arbitrage strategies suggests that investors could take advantage of these negative abnormal returns by going long on the firm's convertible bond and short on the firm's stock at the issue date.
Social Science Research Network, 2010
While convertible offerings announced between 1984 and 1999 induce average abnormal stock returns of −1.69%, convertible announcement effects over the period 2000 to 2008 are more than twice as negative (−4.59%). We hypothesize that this evolution is attributable to a shift in the convertible bond investor base from long-only investors towards convertible arbitrage funds. These funds buy convertibles and short the underlying stocks, causing downward price pressure. Consistent with this hypothesis, we find that the differences in announcement returns between the Traditional Investor period (1984-1999) and the Arbitrage period (2000-September 2008) disappear when controlling for arbitrage-induced short selling. Post-issuance stock returns are also in line with the arbitrage explanation. Average announcement effects of convertibles issued during the recent financial crisis are even more negative (−9.12%). This result can be attributed to the severe underpricing of crisis-period convertible offerings, which outweighs the impact of the diminished influence of convertible arbitrage funds.
Journal of Banking & Finance, 2012
While convertible offerings announced between 1984 and 1999 induce average abnormal stock returns of À1.69%, convertible announcement effects over the period 2000-2008 are more than twice as negative (À4.59%). We hypothesize that this evolution is attributable to a shift in the convertible bond investor base from long-only investors towards convertible arbitrage funds. These funds buy convertibles and short the underlying stocks, causing downward price pressure. Consistent with this hypothesis, we find that the differences in announcement returns between the Traditional Investor period (1984-1999) and the Arbitrage period (2000-September 2008) disappear when controlling for arbitrage-induced short selling associated with a range of hedging strategies. Post-issuance stock returns are also in line with the arbitrage explanation. Average announcement effects of convertibles issued during the Global Financial Crisis are even more negative (À9.12%), due to a combination of short-selling price pressure and issuer, issue, and macroeconomic characteristics associated with these offerings.