Risk Changes around Calls of Convertible Bonds (original) (raw)
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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.
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.
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.
Risk dynamics surrounding the issuance of convertible bonds
2012
This paper analyzes the risk dynamics surrounding convertible bond offerings (CBOs) and Seasoned Equity Offerings (SEOs). As convertible bonds are commonly believed to be very effective at mitigating adverse selection or overinvestment problems we would expect differing risk and return patterns for convertible bond and seasoned equity issuers. By analyzing 1148 convertible bond offerings and comparing them to 2905 seasoned equity offerings, we show however that for both issuer types the systematic risk increases prior to issuance and drops sharply thereafter. This result is consistent with the notion of exercising real options, as growth options are always riskier than the underlying assets and exercising them at issuance causes an immediate drop in risk. The real option framework and the proposed dynamics of systematic risk also provide a rational explanation for the negative announcement effect, as well as any long-term underperformance subsequent to the CBO and the SEOs.► We analyze the risk dynamics of convertible bond and Seasoned Equity Offerings. ► Both issuers show an increase in risk prior to and a drop after the issuance. ► This result is consistent with the notion of exercising real options. ► The risk changes are responsible for the underperformance of CBO and SEO issuers.
Stock Returns before and After Calls of Convertible Bonds
The Journal of Financial and Quantitative Analysis, 1990
Page 1. JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS VOL. 25, NO. 4, DECEMBER 1990 Stock Returns before and after Calls of Convertible Bonds Arnold R. Cowan, Nandkumar Nayar, and Ajai K. Singh* Abstract ...
Risk and return in convertible arbitrage: Evidence from the convertible bond market
2010
In this paper, we identify and document the empirical characteristics of the key drivers of convertible arbitrage as a strategy and how they impact the performance of convertible arbitrage hedge funds. We show that the returns of a buy-and-hedge strategy involving taking a long position in convertible bonds ("CBs") while hedging the equity risk alone explains a substantial amount of these funds' return dynamics. In addition, we highlight the importance of non-price variables such as extreme market-wide events and the supply of CBs on performance. Out-ofsample tests provide corroborative evidence on our model's predictions. At a more micro level, larger funds appear to be less dependent on directional exposure to CBs and more active in shorting stocks to hedge their exposure than smaller funds. They are also more vulnerable to supply shocks in the CB market. These findings are consistent with economies of scale that large funds enjoy in accessing the stock loan market. However, the friction involved in adjusting the stock of risk capital managed by a large fund can negatively impact performance when the supply of CBs declines. Taken together, our findings are consistent with convertible arbitrageurs collectively being rewarded for playing an intermediation role of funding CB issuers whilst distributing part of the equity risk of CBs to the equity market.
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.
The Long-Run Performance Following Convertible Debt Offerings: Does The Design Matter?
Journal of Applied Business Research (JABR), 2014
This paper examines the impact of convertible debt design on the long-run stock price performance of the issuing firms in France. More specifically, we divide French convertible bonds (CBs) into three categories; namely, debt-like, mixed, and equity-like CBs, based on their total conversion probability, which integrates the possibility of early exercise of the call feature. In line with previous empirical studies, our results show that French CB issuers experience a substantial increase in their stock price profitability before the offering followed by significant underperformance over the three year post-issue event window. However, the breakdown of our sample into three groups of CBs depending on their design reveals, on one hand, a strong evidence of stock price run-up before the offering only for equity-like and mixed CBs. On the other hand, the post-issue performance is worse only for equity-like issuers, indicating that the post-issue performance is poorer the more the convertible debt issuer's stock is over-valued prior to the offering. This finding is consistent with the market timing hypothesis.
Convertible call policies : An empirical analysis of an information-signaling hypothesis
Journal of Financial Economics - J FINAN ECON, 1987
This paper tests an information-signaling hypothesis as a potential explanation for corporate convertible bond call policies and for the negative share price reaction to the announcement of the calls. We test this hypothesis by trying to ascertain whether the information signaled is realized. Our results show an unexpected decline in the firm's performance.subsequent to the call. We also find significant negative cumulative returns during a sixty-month period following the calls.
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.