Agency Effects in the Convertible Debt Puzzle: An Empirical Investigation
We suggest that the symmetry of stock price reactions observed to the issuance and subsequent redemption of convertible bonds can be partially explained by agency effects. Using a hand collected dataset we test whether the heterogeneity in cumulative abnormal returns at these two corporate event dates can be explained by agency problems. Our results confirm there exists heterogeneity in the observed negative stock market returns at these dates that are related to proxies for agency problems (between firm management and stockholder). Similarly, upon redemption, we find that forced conversion is more likely to happen in firms more likely to suffer from agency conflicts and in low value firms, which explains the negative stock market reaction at that date. Finally, we find that call redemptions of out-of-the money bonds experience a positive stock price reaction contrasting with the negative reaction seen for in-the-money bond calls which further supports the agency problems story.
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.:
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Datta, Sudip & Iskandar-Datta, Mai, 1996. "New Evidence on the Valuation Effects of Convertible Bond Calls," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(02), pages 295-307, June.
- Mazzeo, Michael A & Moore, William T, 1992. "Liquidity Costs and Stock Price Response to Convertible Security Calls," The Journal of Business, University of Chicago Press, vol. 65(3), pages 353-69, July.
- James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, 02.
- Harris, Milton & Raviv, Artur, 1985. " A Sequential Signalling Model of Convertible Debt Call Policy," Journal of Finance, American Finance Association, vol. 40(5), pages 1263-81, December.
- Kim, Yong-Cheol & Stulz, Rene M, 1992. "Is There a Global Market for Convertible Bonds?," The Journal of Business, University of Chicago Press, vol. 65(1), pages 75-91, January.
- Nyborg Kjell G., 1995. "Convertible Debt as Delayed Equity: Forced versus Voluntary Conversion and the Information Role of Call Policy," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 358-395, October.
- Mikkelson, Wayne H. & Partch, M. Megan, 1986. "Valuation effects of security offerings and the issuance process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 31-60.
- Ingersoll, Jonathan E, Jr, 1977. "An Examination of Corporate Call Policies on Convertible Securities," Journal of Finance, American Finance Association, vol. 32(2), pages 463-78, May.
- Jeremy C. Stein, 1992.
"Convertible Bonds as "Back Door" Equity Financing,"
NBER Working Papers
4028, National Bureau of Economic Research, Inc.
- Ofer, Aharon R. & Natarajan, Ashok, 1987. "Convertible call policies : An empirical analysis of an information-signaling hypothesis," Journal of Financial Economics, Elsevier, vol. 19(1), pages 91-108, September.
- Mikkelson, Wayne H., 1981. "Convertible calls and security returns," Journal of Financial Economics, Elsevier, vol. 9(3), pages 237-264, September.
- McConnell, John J. & Servaes, Henri, 1995. "Equity ownership and the two faces of debt," Journal of Financial Economics, Elsevier, vol. 39(1), pages 131-157, September.
- 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.
- Byrd, Anthony K & Moore, William T, 1996. "On the Information Content of Calls of Convertible Securities," The Journal of Business, University of Chicago Press, vol. 69(1), pages 89-101, January.
- Brennan, M J & Schwartz, Eduardo S, 1977. "Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion," Journal of Finance, American Finance Association, vol. 32(5), pages 1699-1715, December.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
- Eckbo, B. Espen, 1986. "Valuation effects of corporate debt offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 119-151.
- Asquith, Paul, 1995. " Convertible Bonds Are Not Called Late," Journal of Finance, American Finance Association, vol. 50(4), pages 1275-89, September.
- 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.
- Arnold R. Cowan & Nandkumar Nayar & Ajai K. Singh, 1993. "Calls of Out-of-the-Money Convertible Bonds," Financial Management, Financial Management Association, vol. 22(4), Winter.
When requesting a correction, please mention this item's handle: RePEc:ptl:wpaper:26. 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: (Enrique Calfucura)
If references are entirely missing, you can add them using this form.