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This paper is a cross-sectional analysis of the relationship between common stock price reactions to announcements of convertible security calls and variables that represent possible determinants of changes in common stockholders' wealth. The variables are measures of the following effects of convertible security calls: (1) the change in interest expense tax shields, (2) the potential redistribution of wealth from common stockholders to preferred stockholders and debt holders, (3) the decrease in the value of conversion privileges heldby convertible security holders, (4) the relative increase in shares outstanding and (5) the change in earnings per share. A significant relationshipis found only between the measure of the reduction in interest expense tax shields and the stock price response to call announcements.The apparent corporate tax effect is consistent with some combination of effects due to (1) a reduction in interest expense tax shields and (2) unfavorable information about the calling firm's value of earnings prospects that is conveyed by a call of convertible securities.The evidence is consistent with theories of capital structure that imply optimal financial leverage depends on earnings prospects and with theories that imply reductions in leverage convey unfavorable information about firm value
The research reported in this volume represents the second stage of a wide-ranging National Bureau of Economic Research effort to investigate "The Changing Role of Debt and Equity in Financing U.S. Capital Formation." The first group of studies sponsored under this project, which have been published individually and summarized in a 1982 volume bearing the same title (Friedman 1982), addressed several key issues relevant to corporate sector behavior along with such other aspects of the evolving financial underpinnings of U.S. capital formation as household saving incentives, international capital flows, and government debt management. In the project's second series of studies, presented at the National Bureau of Economic Research conference in January 1983 and published here for the first time along with commentaries from that conference, the central focus is the financial side of capital formation undertaken by the U.S. corporate business sector. At the same time, because corporations' securities must be held, a parallel focus is on the behavior of the markets that price these claims.
The definitive book on the subject, Convertible Securities explains the various types of convertible instruments, valuation and pricing methods, and investment strategies. Completely updated from its first edition, this guide includes chapters on international convertibles and asset allocation strategies for the institutional investor.
This paper addresses the relationship between the capital structure and the systematic risk of common equity for a firm whose capital structure includes convertible securities. Adding warrants to the capital structure reduces the systematic risk of equity, which is consistent with the fact that warrants dampen the volatility of equity by reducing the upside potential gains of existing stockholders. Expressions showing the impact of conversion features in debt and preferred stock on the systematic risk of equity are derived, and contrasted with the systematic risk effects of non-convertible debt or non-convertible preferred stock financing. Failure to incorporate conversion features may lead to serious errors in assessing the impact of financing alternatives on the risk of equity.
Introducing a revolutionary new quantitative approach to hybrid securities valuation and risk management To an equity trader they are shares. For the trader at the fixed income desk, they are bonds (after all, they pay coupons, so what's the problem?). They are hybrid securities. Neither equity nor debt, they possess characteristics of both, and carry unique risks that cannot be ignored, but are often woefully misunderstood. The first and only book of its kind, The Handbook of Hybrid Securities dispels the many myths and misconceptions about hybrid securities and arms you with a quantitative, practical approach to dealing with them from a valuation and risk management point of view. Describes a unique, quantitative approach to hybrid valuation and risk management that uses new structural and multi-factor models Provides strategies for the full range of hybrid asset classes, including convertible bonds, preferreds, trust preferreds, contingent convertibles, bonds labeled "additional Tier 1," and more Offers an expert review of current regulatory climate regarding hybrids, globally, and explores likely political developments and their potential impact on the hybrid market The most up-to-date, in-depth book on the subject, this is a valuable working resource for traders, analysts and risk managers, and a indispensable reference for regulators