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

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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