The role of time value in convertible bond call policy (original) (raw)
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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
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.
Convertible Bond Issuance, Risk, and Firm Financial Policy: A New Approach
International Journal of Business, 2013
This paper develops a new model of convertible bonds in the firm's financial policy that several empirical puzzles that are not consistent with extant theory. The model demonstrates that managers of all types of firms, irrespective of quality would choose convertible bonds in their financing plans when facing uncertainties about the timing of the project. This result holds even for the case in which management's prognosis about the likelihood of success of the project is correct. Convertible bond issuance can be optimal for firms that do not have an established record of strong historical performance but have opportunity sets that include good projects subject to timing uncertainties. For other firms, there may be cost/benefit tradeoffs on their use. Investors can derive direct benefits from the signaling properties of convertibles: their issuance per se is a credible signal on the expected future prospects of the firm. Furthermore, convertibles provide indirect advantages to investors since they help to complete the markets. Alternative instruments are incapable of replicating the payout structure of convertibles in a cost-effective manner. These direct vs. indirect effects can be empirically tested, based on the return structure of naked vs. hedged positions in convertible bonds.
Determinants of the call option on corporate bonds
Journal of Banking & Finance, 1992
A number of hypotheses have been proposed as explanations of the call feature in corporate bonds. Using a large sample of callable and noncallable corporate bonds issued during the period 1977-1986, this paper simultaneously examines the empirical validity of five hypotheses that have been offered to explain the call option. The evidence provides no support for the hypotheses that the call option provides managerial flexibility or tax advantages. There is mixed support for agency cost explanations of the corporate call feature. The call feature is found to be highly correlated with the level of interest rates and the maturity of debt issues. That is, the call feature is found to be more likely during periods of higher interest rates and for longer maturity bonds.
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 ...
Journal of Financial Economics, 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.
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.
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.
Recurrent Survival Analysis of Sequential Conversions of Convertible Bond
centerforpbbefr.rutgers.edu
Instead of a block conversion assumed in previous literature, this study explores the relationship between the hazard rate of sequential conversion over the lifespan of a convertible bond and individual bond's time-dependent characteristics, including the difference between the equity's price and conversion price, the dividend, and the risk-free interest rate. The histories of 130 convertible bonds' conversions and attributes collected. By considering individual bond's sequential conversions as recurrent events and a recurrent survival analysis technique (Anderson and Gill, 1982;, an extension of the Cox proportional hazard model, is adopted. Our analysis shows that the difference between the equity's price and conversion price has a positive effect on the hazard rate of conversion, while dividend and risk-free interest rate have negative effects. It is hoped the results can provide a cornerstone for the pricing of convertible bonds based on the observation of sequential conversion in real life instead of a block conversion assumed in previous literature.
Convertible Bonds with Call Notice Periods
2003
In practice, convertible bonds can often be called only if notice is given to the holders. Most methods for valuing convertible bonds assume that the bond is continuously callable. In this paper, we develop an accurate PDE method for valuing convertible bonds with a finite notice period. Example computations are presented which illustrate the effect of varying notice periods. The results are compared with a recently published approximation method.