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Negative stock price reactions to conversion-forcing calls of convertible bonds and preferred stocks are re-examined, and most of the sample firms are shown to exhibit full price recovery by the end of the conversion period. In addition, analysts' earnings forecasts, both short-term and long-term, are found to be revised upward following call announcements for convertible bonds and preferred stocks. The combined findings cast doubt on the established belief that such capital structure decisions signal negative information about firm value.
This study resolves the puzzling evidence on convertible bonds by documenting that conversion-forcing calls are indeed bad news. Supporting the long-term implications of Harris and Raviv (1985), we document that the common stocks of calling firms substantially underperform their benchmarks by a median of 64% over the five-year post-call period. In contrast, firms that choose not to call their in-the-money convertibles exhibit no long-run abnormal performance. We show that studies drawing conclusions based on short-term price reversal immediately following the call fail to completely capture the valuation effect that occurs over a longer time horizon. We document that the market condition at the time of the call (issuance volume) and cash flow benefits related to the call (relation between dividend and after tax coupon payment) influence the post-call stock price performance. Our analysis also reveals that the post-call underperformance of high-growth firms is more pronounced than that of low-growth firms, indicating greater market exuberance associated with high-growth firms at the time of the call.
First published in 2001. The revision of this important work contains all new data on the long-overlooked convertible securities market. It offers invaluable information on the analytical as well as the statistical tools which investors need to add quality to their investment portfolios. Topics include: * Convertible securities as an asset class and as an alternative investment * Market capitalization of convertible securities * An overview of the equity warrant market * Special provisions in the warrant markets * Finding undervalued warrants * Convertible bond hedging strategies * Portfolio management.
From The Handbook of Fixed Income Securities--the most authoritative, widely read reference in the global fixed income marketplace--comes this sample chapter. This comprehensive survey of current knowledge features contributions from leading academics and practitioners and is not equaled by any other single sourcebook. Now, the thoroughly revised and updated seventh edition gives you the facts and formulas you need to compete in today's transformed marketplace. It places increased emphasis on applications, electronic trading, and global portfolio management.
We examine the long-run performance of the common stock of firms following calls of both straight and convertible debt from 1945 to 1995. Using a sample of 718 calls of straight debt, we find an average abnormal return in the five years following the call of between 0.16% and 0.34% per month, which compounds to an economically and statistically significant 11% to 22% over the five-year period. This evidence of overperformance following calls shows a distinct symmetry between the straight debt and equity markets. Issues of debt and equity are both followed by long-term underperformance, whereas stock repurchases and debt calls are both followed by long-run over-performance. For our sample of 713 calls of convertible debt, we find little systematic evidence of abnormal performance following the call. Some researchers suggest that calls of convertible debt provide negative signals to the market. Our results provide no support for this claim. In contrast, our evidence of marginal positive long-run returns provides weak support for the model that calls of convertible debt signal the realization of profitable investment options, and for the price pressure hypothesis.
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.
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