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Financial Markets and Portfolio Management

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01.02.2015

Calls of convertible debt securities: no bad news at all

verfasst von: Tobias Nigbur

Erschienen in: Financial Markets and Portfolio Management | Ausgabe 1/2015

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Abstract

In this paper, I examine the impact of in-the-money convertible bond calls on stock prices, employing a sample of US convertible bond calls over the period 1994–2011. In contrast to previous literature, I find that conversion-forcing convertible bond calls do not significantly influence stock prices. I posit that the discrepancy between my results and those in the literature is caused by amplified screening criteria, especially strong news cleaning. Companies tend to announce calls as side notes to other major corporate news, resulting in an event-study bias. Further, convertible bond design, moneyness of the conversion option at the announcement date, and convertible-arbitrage strategies cast doubt on the negative abnormal returns reported by previous literature.

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Mergent FISD database, US headquartered companies in non-regulated industries.

Moneyness of the conversion option is defined as the ratio of the equity value received by conversion (conversion value) divided by the amount of cash obtained from immediate redemption (nominal plus accrued interest) minus one.

For a brief discussion, see Sect. 4.

According to Fama (1970), all three market efficiencies imply that all past information is reflected in the current stock price.

SIC codes 6000–6999 and 4800–4999. If the codes assigned in the Bloomberg and CRSP database do not match and one code falls in the regulated industries, I exclude the event.

https://doi.org/mba.tuck.dartmouth.edu/pages/faculty/ken.french/.

Note that the order of the nine screening criteria is irrelevant and, depending on the order, the decrease of events in every criteria is very volatile. I find only the news filter to have a significantly higher impact on the sample size than the other criteria. If all criteria are fulfilled except (4), (7) and (8), I find that 9 events drop out due to new convertibles, 17 call amounts are too low and 51 incorporate other news.

In the CAPM-like event study, the sample diminishes due to the estimation period.

I refer to this effect in the hypothesis section.

See Bajo and Barbi (2012) for an excellent review of optimal call policies.

Screening criteria (1), (5) and (6) apply.

I obtain similar results for market-adjusted returns.

For the later estimation window, I include an event if the company exists in \(t\in \) (251,351), a subset of 100 days of the full estimation period \(t\in \) (251,506). However, the results do not change when only full periods are used.

Note that for this regression approach, two events drop out of the sample due to a too short estimation period, but will be included in the cross-sectional regressions.

Another regression setup would be to introduce a dummy variable for every contemporary news and screening criteria. However, this would substantially diminish the degrees of freedom since the set of news is very heterogeneous.

An event can be in more than one category. Merger-related calls do not count as other news.

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Titel: Calls of convertible debt securities: no bad news at all
verfasst von: Tobias Nigbur
Publikationsdatum: 01.02.2015
Verlag: Springer US
Erschienen in: Financial Markets and Portfolio Management / Ausgabe 1/2015
Print ISSN: 1934-4554
Elektronische ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-014-0243-z

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