Indian Convertible Bonds with Unspecified Terms: An Empirical Study
Indian convertible bonds have two peculiar features that make them possibly unique in the world: a) the bonds are compulsorily converted into equity without any option, and b) the conversion terms are not specified at the time of issue but are left to be determined subsequently by the Controller of Capital Issues (CCI) who is the government functionary regulating capital issues in India. A naive model would say that the market simply forms an estimate of the likely conversion terms and then values the bond as if these terms were prespecified. This paper examines the market prices of one of the largest issues of Indian convertible bonds with unspecified terms. The empirical investigation convincingly rejects the naive model and demonstrates that changes in the markets expectation of the conversion terms are a significant factor affecting the pricing relationship. These changes are significantly correlated with the stock price itself. We do not, however, find any evidence that the market expects the CCI to adjust the conversion terms on the basis of the actual market price to protect the bondholder. But, there is strong evidence that changes in expected conversion terms affect the share price through the dilution effect. Since the unspecified terms have only added to the uncertainty of the bondholders without giving them any perceived benefits we recommend that this system should be abolished. In a companion paper, Barua and Varma (1991) present a theoretical valuation model for the Indian convertible bonds with unspecified terms. The empirical results in this paper confirm the predictions of that model.
|Date of creation:||01 Dec 1991|
|Contact details of provider:|| Phone: 91 79 2630 7241|
Fax: 91 79 2630 6896
Web page: https://web.iima.ac.in/publications
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barua, Samir K. & Varma, Jayanth R., 1991. "Indian Convertible Bonds with Unspecified Terms: A Valuation Model," IIMA Working Papers WP1991-12-01_01067, Indian Institute of Management Ahmedabad, Research and Publication Department.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-384, March.
When requesting a correction, please mention this item's handle: RePEc:iim:iimawp:wp01066. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.