Top

Financial Markets and Portfolio Management

Published in:

01-02-2015

Calls of convertible debt securities: no bad news at all

Author: Tobias Nigbur

Published in: Financial Markets and Portfolio Management | Issue 1/2015

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

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.

previous article Covariance averaging for improved estimation and portfolio allocation

next article Anat R. Admati and Martin Hellwig: The Bankers’ New Clothes—What’s Wrong with Banking and What to Do About It

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

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.

Agarwal, V., Fung, W.H., Loon, Y.C., Naik, N.Y.: Risk and return in convertible arbitrage: evidence from the convertible bond market. J. Empir. Finance 18, 175–194 (2011)CrossRef

Amihud, Y.: Illiquidity and stock returns: cross-section and time-series effects. J. Financ. Mark. 5, 31–56 (2002)CrossRef

Andrews, D.W.K., Buchinsky, M.: Evaluation of a three-step method for choosing the number of bootstrap repetitions. J. Econom. 103, 345–386 (2001)CrossRef

Bajo, E.: The information content of abnormal trading volume. J. Bus. Finance Account. 37, 950–978 (2010)CrossRef

Bajo, E., Barbi, M.: The role of time value in convertible bond call policy. J. Bank. Finance 36, 550–563 (2012)CrossRef

Bechmann, K.L.: The difference between out-of-the-money and in-the-money convertible bond calls. Working paper Copenhagen Business School (2001)

Bechmann, K.L.: Short sales, price pressure, and the stock price response to convertible bond calls. J. Financ. Mark. 7, 427–451 (2004)CrossRef

Biktimirov, E.N., Cowan, A.R., Jordan, B.D.: Do demand curves for small stocks slope down? J. Financ. Res. 27, 161–178 (2004)CrossRef

Brennan, M.J., Schwartz, E.S.: Convertible bonds: valuation and optimal strategies for call and conversion. J. Finance 32, 1699–1715 (1977)CrossRef

Brick, I.E., Palmon, O., Patro, D.K.: Stock price response to calls of convertible bonds: still a puzzle? Financ. Manag. 36, 1–21 (2007)CrossRef

Brown, S.J., Grundy, B.D., Lewis, C.M., Verwijmeren, P.: Convertible and hedge funds as distributors of equity exposure. Rev. Financ. Stud. 25, 3077–3112 (2012)CrossRef

Byrd, A.K., Moore, W.T.: On the information content of calls of convertible securities. J. Bus. 69, 89–101 (1996)CrossRef

Cowan, A.R., Nayar, N., Singh, A.K.: Stock returns before and after calls of convertible bonds. J. Financ. Quant. Anal. 25, 549–554 (1990)CrossRef

Dann, L.Y., Mikkelson, W.H.: Convertible debt issuance, capital structure change and financing-related information: some new evidence. J. Financ. Econ. 13, 157–186 (1984)CrossRef

Davison, A.C., Hinkley, D.V.: Bootstrap methods and their application, Cambridge University Press (1997)

de Jong, A., Dutordoir, M., van Genuchten, N., Verwijmeren, P.: Convertible arbitrage price pressure and short-sale constraints. Financ. Anal. J. p. 68 (2012)

Ederington, L.H., Goh, J.C.: Is a convertible bond call really bad news? J. Bus. 74, 459–476 (2001)CrossRef

Fama, E.F.: Efficient capital markets: a review of theory and empirical work. J. Finance 25, 383–417 (1970)CrossRef

Fama, E.F., French, K.R.: Common risk factors in the returns on stocks and bonds. J. Financ. Econ. 33, 3–56 (1993)CrossRef

Garcia-Feijóo, L., Beyer, S., Johnson, R.R.: Risk changes around calls of convertible bonds. Financ. Rev. 45, 541–556 (2010)CrossRef

Harris, M., Raviv, A.: A sequential signaling model of convertible debt call policy. J. Finance 40, 1263–1281 (1985)CrossRef

Ingersoll, J.E.: A contingent-claims valuation of convertible securities. J. Financ. Econ. 4, 289–321 (1977)CrossRef

King, T.-H.D., Mauer, D.C.: Determinants of corporate call policy for convertible bonds. J. Corp. Finance 24, 112–134 (2014)CrossRef

Lewis, C.M., Rogelski, R.J., Seward, J.K.: Is convertible debt a substitute for straight debt or for common equity? Financ. Manag 28, 5–27 (1999)CrossRef

Lewis, C.M., Rogelski, R.J., Seward, J.K.: The long-run performance of firms that issue convertible debt: an empirical analysis of operating characteristics and analyst forecasts. J. Corp. Finance 7, 447–474 (2001)CrossRef

Lewis, C.M., Rogelski, R.J., Seward, J.K.: Risk changes around convertible debt offerings. J. Corp. Finance 8, 67–80 (2002)CrossRef

Maquieira, C.P., Megginson, W.L., Nail, L.: Wealth creation versus wealth redistributions in pure stock-for-stock mergers. J. Financ. Econ. 48, 3–33 (1998)CrossRef

Mayers, D.: Why firms issue convertible bonds: the matching of financial and real investment options. J. Financ. Econ 47, 83–102 (1998)CrossRef

Mazzeo, M.A., Moore, W.T.: Liquidity costs and stock price response to convertible security calls. J. Bus. 65, 353–369 (1992)CrossRef

McWilliams, A., Siegel, D.: Event studies in management research: theoretical and empirical issues. Acad. Manag. J. 40, 626–657 (1997)

Mikkelson, W.H.: Convertible calls and security returns. J. Financ. Econ. 9, 237–264 (1981)CrossRef

Mitchell, M., Pedersen, L.H., Pulvino, T.: Slow moving capital. NBER Working Paper, p. 12877 (2007)

Nash, R.C., Netter, J.M., Poulsen, A.B.: Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants. J. Corp. Finance 9, 201–232 (2003)CrossRef

Ofer, A.R., Natarajan, A.: Convertible call policies: An empirical analysis of an information-signaling hypothesis. J. Financ. Econ. 19, 91–108 (1987)CrossRef

Stein, J.C.: Convertible bonds as backdoor equity financing. J. Financ. Econ. 32, 3–21 (1992)CrossRef

Title: Calls of convertible debt securities: no bad news at all
Author: Tobias Nigbur
Publication date: 01-02-2015
Publisher: Springer US
Published in: Financial Markets and Portfolio Management / Issue 1/2015
Print ISSN: 1934-4554
Electronic ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-014-0243-z

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 1/2015

Anat R. Admati and Martin Hellwig: The Bankers’ New Clothes—What’s Wrong with Banking and What to Do About It

Covariance averaging for improved estimation and portfolio allocation

A note on sorting bias correction in regression-based mutual fund tournament tests

Fund performance and subsequent risk: a study of mutual fund tournaments using holdings-based measures