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Capital Structure Change and Decreases in Stockholders' Wealth: A Cross-Sectional Study of Convertible Security Calls

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  • Wayne H. Mikkelson
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    Abstract

    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.

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    File URL: http://www.nber.org/papers/w1137.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1137.

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    Date of creation: Jun 1983
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    Publication status: published as Mikkelson, Wayne H. "Capital Structure Change and Decreases in Stockholders' Wealth: A Cross-Sectional Study of Convertible Security Calls." Corporate Capital Structures in the United States, ed. by Benjamin M. Friedman. Chicago UCP. (1985), pp. 265-296.
    Handle: RePEc:nbr:nberwo:1137

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    1. Mikkelson, Wayne H., 1981. "Convertible calls and security returns," Journal of Financial Economics, Elsevier, vol. 9(3), pages 237-264, September.
    2. Masulis, Ronald W., 1980. "The effects of capital structure change on security prices : A study of exchange offers," Journal of Financial Economics, Elsevier, vol. 8(2), pages 139-178, June.
    3. Masulis, Ronald W, 1983. " The Impact of Capital Structure Change on Firm Value: Some Estimates," Journal of Finance, American Finance Association, vol. 38(1), pages 107-26, March.
    4. Marsh, Paul, 1979. "Equity Rights Issues and the Efficiency of the UK Stock Market," Journal of Finance, American Finance Association, vol. 34(4), pages 839-62, September.
    5. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    6. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    7. Dann, Larry Y., 1981. "Common stock repurchases : An analysis of returns to bondholders and stockholders," Journal of Financial Economics, Elsevier, vol. 9(2), pages 113-138, June.
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    Cited by:
    1. Jalan, P. & Barone-Adesi, G., 1995. "Equity financing and corporate convertible bond policy," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 187-206, May.
    2. Asquith, Paul, 1948-, 1992. "Convertible debt--a dynamic test of call policy," Working papers 3413-92., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Kim, Yong O. & Kallberg, Jarl, 1998. "Convertible calls and corporate taxes under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 19-40, January.

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