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Why are conversion-forcing call announcements associated with negative wealth effects?

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  • Grundy, Bruce D.
  • Veld, Chris
  • Verwijmeren, Patrick
  • Zabolotnyuk, Yuriy

Abstract

We analyze call announcement returns taking into account two recent developments in the convertible bond market: the inclusion of dividend protection clauses in convertibles' terms, and the high fraction of convertible issues purchased by hedge funds. Calls of dividend-protected convertible bonds are predictable, yet we still observe a negative stock price reaction that cannot be explained by signaling. Greater hedge fund involvement prior to a call means less short selling in response to the call and we document a reduced price reaction. We conclude that price pressure and not signaling underlies the negative announcement effect of convertible bond calls.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 24 (2014)
Issue (Month): C ()
Pages: 149-157

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Handle: RePEc:eee:corfin:v:24:y:2014:i:c:p:149-157

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Convertible call announcement effects; Signaling; Price pressure; Dividend protection; Hedge funds;

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References

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Cited by:
  1. Bechmann, Ken L. & Lunde, Asger & Zebedee, Allan A., 2014. "In- and out-of-the-money convertible bond calls: Signaling or price pressure?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 24(C), pages 135-148.
  2. Dutordoir, Marie & Lewis, Craig & Seward, James & Veld, Chris, 2014. "What we do and do not know about convertible bond financing," Journal of Corporate Finance, Elsevier, Elsevier, vol. 24(C), pages 3-20.

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