An examination of investors’ reaction to the announcement of CoCo bonds issuance: A global outlook (original) (raw)
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Convertible Bond Issues: Evidence from Security Markets
The Financial Review, 1995
A convertible bond (CB) is a hybrid security containing elements of both common stock and straight debt. Still, empirical investigations on CB issue announcements have failed to discern any pattern in the stock market reaction that is consistent with announcements of either common equity or straight debt issues. This study shows that (a) motives for issuing the CB and (b) its rating (and to a less extent the riskiness of the issuing firm) help explain the stock market reaction to CB issue announcements. Specifically, announcement of a CB issue with an explicitly stated motive for the use of proceeds, when coupled with a high (low) bond rating, generates a stock market response similar to a straight debt (common stock) issue. On the other hand, the preference of CB holders is dictated by the motive for the use of proceeds and the conversion premium. These findings highlight the critical importance of the motive of issue in determining reactions in both the stock and bond markets.
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.
European Financial Management, 2015
This paper examines common risk factors in Euro-denominated corporate bond returns before and after recent financial crisis. Our results suggest that level and slope of interest rate and default spread term structures significantly improve the explanatory power of asset pricing models for the cross-section of corporate bonds. Further, we demonstrate that corporate bonds with maturities between one and three years continue to yield statistically significant abnormal returns even after controlling for the levels and slopes of interest and default spread term structures. The abnormal returns are up to 151 basis points annually for these short term bonds and are thus of considerable economic interest. The sensitivity of corporate bond returns to interest rate level and slope risk is quite stable over time, whereas the sensitivity to level and slope default risk factors changed during the period of recent financial crisis. Our results are robust to GRS-test, calendar seasonality, and use of alternative risk-free benchmarks.
International Journal of Accounting and Business Finance
Employing the event study methodology, this research probes the response of share prices to announcements of rights issues and debenture issues within the Colombo Stock Exchange. The market model, a quintessential tool for estimating abnormal returns, was harnessed to scrutinize samples encompassing rights issue announcements (n=85) and debenture issue announcements (n=106). These events transpired within the period spanning 2012 to 2019, providing a context post-Global Financial Crisis and pre-COVID-19 pandemic. The findings evince a notable negative reaction of share prices concurrent with the disclosure of rights issuance on the announcement day. Conversely, a non-significant positive reaction was observed for share prices on the debenture issue announcement date. The examination of the selected sectors' share price responses to both rights issue announcements and debenture issue announcements yielded mixed outcomes. Additionally, the results unveil a discrepancy with the sem...
Frequency and Sequence: Convertible Debt Issuance Announcement Effect on Stock Returns
2018
Convertible debt that shares the characteristics of debt and equity is perceived to be riskier than straight debt, therefore the issuance announcement tends to lead to adverse market reaction. In this study we show that convertible debt issuance announcement is also associated with negative abnormal returns with evidence from the Malaysia capital market. We argue that the substantially smaller and illiquid convertible debt market do not affect the consistency of the findings. However, the main purpose of this study is to examine the effect of frequency and sequence of convertible debt issuance announcement on the issuers stock return. We find that both the frequency and sequence of issuance significantly affect the announcement returns. In the longer event window, we observe negative abnormal returns for the infrequent issuers. While frequent issuers report positive abnormal returns. Looking at the sequence of issuance, the first issues of convertible debt lead to negative market re...
The Preferences of CoCo Bond Buyers and Sellers : A Logistic Regression Analysis November 2019
2020
This paper estimates the preference scores of CoCo bond buyers and sellers by running logistic regressions taking into account both bond and issuing bank’s characteristics; it also provides evidence on the role of country−specific CoCo bond market concentration. Buyers are defined as having a preference for CoCo bonds if their return-to-risk is higher than the corresponding 25, 50 and 75 annual percentile values; the preferences of buyers and sellers are assumed to be mutually exclusive. Differences in the degree of risk aversion of buyers and sellers and in the determinants of their preferences are found across percentiles. Further, coupon payment, conversion mechanism, credit rating and P/B ratio appear to be the strongest global determinants of CoCo bond trading between buyers and sellers, these being very responsive to CoCo bond and issuing bank’s characteristics in most European countries, Brazil, Mexico and China (especially in the UK and China). JEL Classification: C25, C39, ...