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Announcement Effects of Contingent Convertible Securities: Evidence from the Global Banking Industry

Listed author(s):
  • Ammann, Manuel

    ()

  • Blickle, Kristian

    ()

  • Ehmann, Christian

    ()

This paper investigates the announcement effects of contingent convertible securities (CoCo bonds) issued by global banks between January 2009 and June 2014. Using a sample of 34 financial institutions and 87 CoCo bond issues, we examine abnormal stock price reactions and CDS spread changes before and after the announcement dates. We find that the announcement of CoCo bonds correlates with positive abnormal stock returns and negative CDS spread changes in the immediate post-announcement period. The effects are most pronounced for first-time issues. We explain the CDS spread changes by the lower probability of costly bankruptcy proceedings and the abnormal stock returns by a signaling framework that is based on pecking order theory and the cost advantage over equity (tax shield). We also examine the factors that are associated with the post-announcement abnormal stock returns and find that the existence of issuer call provisions reduces the positive abnormal returns.

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File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1525.pdf
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Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1525.

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Length: 38 pages
Date of creation: Dec 2015
Handle: RePEc:usg:sfwpfi:2015:25
Contact details of provider: Phone: +41 71 243 40 11
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Web page: http://www.unisg.ch/de/universitaet/schools/finance

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  1. Craig M. Lewis & Richard J. Rogalski & James K. Seward, 1999. "Is Convertible Debt a Substitute for Straight Debt or for Common Equity?," Financial Management, Financial Management Association, vol. 28(3), Fall.
  2. Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
  3. Stefan Avdjiev & Anastasia Kartasheva & Bilyana Bogdanova, 2013. "CoCos: a primer," BIS Quarterly Review, Bank for International Settlements, September.
  4. Stein, Jeremy C., 1992. "Convertible bonds as backdoor equity financing," Journal of Financial Economics, Elsevier, vol. 32(1), pages 3-21, August.
  5. JULES H. van BINSBERGEN & JOHN R. GRAHAM & JIE YANG, 2010. "The Cost of Debt," Journal of Finance, American Finance Association, vol. 65(6), pages 2089-2136, December.
  6. Burlacu, Radu, 2000. "New evidence on the pecking order hypothesis: the case of French convertible bonds," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 439-459, December.
  7. Corrado, Charles J. & Zivney, Terry L., 1992. "The Specification and Power of the Sign Test in Event Study Hypothesis Tests Using Daily Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(03), pages 465-478, September.
  8. Fields, L Paige & Mais, Eric L, 1991. " The Valuation Effects of Private Placements of Convertible Debt," Journal of Finance, American Finance Association, vol. 46(5), pages 1925-1932, December.
  9. Davidson, Wallace N. & Glascock, John L. & Schwarz, Thomas V., 1995. "Signaling with Convertible Debt," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(03), pages 425-440, September.
  10. Ammann, Manuel & Fehr, Martin & Seiz, Ralf, 2006. "New evidence on the announcement effect of convertible and exchangeable bonds," Journal of Multinational Financial Management, Elsevier, vol. 16(1), pages 43-63, February.
  11. Deen Kemsley & Doron Nissim, 2002. "Valuation of the Debt Tax Shield," Journal of Finance, American Finance Association, vol. 57(5), pages 2045-2073, October.
  12. Dann, Larry Y. & Mikkelson, Wayne H., 1984. "Convertible debt issuance, capital structure change and financing-related information : Some new evidence," Journal of Financial Economics, Elsevier, vol. 13(2), pages 157-186, June.
  13. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
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