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Convertible Bonds: Test of a Financial Signalling Model

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Author Info
Michael Brennan (Anderson School of Management)
Constance Her (Anderson School of Management, Ph.D Student)
Abstract

This paper presents an empirical test of the Brennan Kraus (1987) hypothesis of convertible bond financing, according to which firms signal their volatility by their choice of terms of the convertible issue. With additional assumptions about the nature of investors' prior beliefs about firm types the model predicts that the announcement period return will be positive related to the face value of the convertible, and negatively related to the fraction of the firm accruing to the convertible holders on conversion. The empirical evidence for a sample of public issues strongly supports these predictions, while that for a sample of private placements does not, which is consistent with problems of information asymmetry being important for the former but not for the latter.

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File URL: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1151&context=anderson/fin
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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number 1151.

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Date of creation: 01 May 1995
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Handle: RePEc:cdl:anderf:1151

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  1. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September. [Downloadable!] (restricted)
  2. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  3. Stein, Jeremy C., 1992. "Convertible bonds as backdoor equity financing," Journal of Financial Economics, Elsevier, vol. 32(1), pages 3-21, August. [Downloadable!] (restricted)
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  4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  6. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June. [Downloadable!] (restricted)
  7. Eckbo, B Espen & Maksimovic, Vojislav & Williams, Joseph, 1990. "Consistent Estimation of Cross-Sectional Models in Event Studies," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(3), pages 343-65. [Downloadable!] (restricted)
  8. Kim, Yong O., 1990. "Informative Conversion Ratios: A Signalling Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(02), pages 229-243, June. [Downloadable!]
  9. Bhattacharya, Sudipto, 1980. "Nondissipative Signaling Structures and Dividend Policy," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 1-24, August.
  10. Hertzel, Michael G & Smith, Richard L, 1993. " Market Discounts and Shareholder Gains for Placing Equity Privately," Journal of Finance, American Finance Association, vol. 48(2), pages 459-85, June. [Downloadable!] (restricted)
  11. Brennan, Michael J & Kraus, Alan, 1987. " Efficient Financing under Asymmetric Information," Journal of Finance, American Finance Association, vol. 42(5), pages 1225-43, December. [Downloadable!] (restricted)
  12. Kim, Yong-Cheol & Stulz, Rene M, 1992. "Is There a Global Market for Convertible Bonds?," Journal of Business, University of Chicago Press, vol. 65(1), pages 75-91, January. [Downloadable!] (restricted)
  13. Wruck, Karen Hopper, 1989. "Equity ownership concentration and firm value : Evidence from private equity financings," Journal of Financial Economics, Elsevier, vol. 23(1), pages 3-28, June. [Downloadable!] (restricted)
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