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| Author | : Guillaume Gosselin |
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| Total Pages | : |
| Release | : 2003 |
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| Author | : Bala Arshanapalli |
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| Total Pages | : 45 |
| Release | : 2004 |
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This study provides new evidence on the market impact of new issues of convertible bonds of U.S. listed firms. We examine on the market reaction surrounding the announcement dates and the issue dates of convertible bonds. The evidence suggests that firms experience negative abnormal returns around the announcement of new issues of convertible bonds. Abnormal returns are found to be a function of firm market value, price-to-book ratio, issue size, as well as the state of the overall market. Simulations using convertible arbitrage strategies suggests that investors could take advantage of these negative abnormal returns by going long on the firm's convertible bond and short on the firm's stock at the issue date.
| Author | : Yuriy Zabolotnyuk |
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| Total Pages | : 0 |
| Release | : 2009 |
| Genre | : Convertible bonds |
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This thesis is a collection of three papers that have the valuation of derivative securities as a common theme. The first paper empirically compares three convertible bond valuation models. We use an innovative approach where all model parameters are estimated by the Marquardt (1963) algorithm using a subsample of convertible bond prices. The model parameters are then used for out-of-sample forecasts of convertible bond prices. The mean absolute deviation, which is calculated as the absolute difference between the model and the market price and expressed as a percentage of the market price, is 1.70% for the Ayache-Forsyth-Vetzal (2003) model, 1.74% for the Tsiveriotis-Fernandes (1998) model, and 2.12% for the Brennan-Schwartz (1980) model. For this and other measures of fit, the Ayache-Forsyth-Vetzal and the Tsiveriotis-Fernandes models outperform the Brennan-Schwartz model. The second paper examines the market memory effect in convertible bond markets. More specifically, we look at the pricing of convertible bonds issued after the original issuer adversely redeemed previous issues without giving an opportunity for investors to benefit from bond value appreciation. We find evidence that the market underprices new convertible bond issues of firms that call their bonds early. We also find that the degree of market underpricing depends on whether the convertibles are more debt- or equity-like. In the third paper, the European put-call parity condition is used to estimate the early exercise premium for American currency options traded on the Philadelphia Stock Exchange. Using a sample of 331 pairs of call and put options with the same exercise price and time to expiration, we find that the early exercise premium on average is 5.03% for put options and 4.60% for call options. The premia for both call and put options are strongly related to the interest rate differential and time to expiration. These results are important to consider when valuing American currency options using European option pricing models.
| Author | : Lin Xiang |
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| Total Pages | : 62 |
| Release | : 2015 |
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We examine the influence of institutional investors on the issuance of convertible bonds using a sample of convertible bonds offered between 1995 and 2014 in the US market. We use delta of the convertible bond, the sensitivity of convertible bond value to the underlying stock price, to categorize the convertible bonds into equity-like or debt-like. Based on an extended pecking order theory of Myers and Majluf (1984), equity-like convertible bonds are issued by firms that suffer less information asymmetry problems and debt-like convertible bonds are issued by firms that suffer less agency cost problems. We find that institutional ownership is positively related with delta. A detailed analysis of testing the relation of different horizons of institutions on delta reveals that dedicated and transient institutions are positively related to delta and are effective in mitigating the asymmetric information problem. Quasi-indexer institutions, on the other hand, have more impact on alleviating the agency cost problem. Institutions with investment style of growth also are positively related with delta, while value-oriented institutions are negatively related with delta, a lower probability of conversion into equity. The results are consistent with the common view that firms with more growth potential tend to issue more equity-like convertible bonds to mitigate the underinvestment problem and avoid the debt overhang problem (Myers, 1977). We also document that stockholders’ reactions to convertible debt announcements are more negative with a higher institutional investor participation.
| Author | : Jinlin Liu |
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| Total Pages | : 55 |
| Release | : 2009 |
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This paper provides new evidence on the effects of the risk profiles of firms on the returns to convertible bond issues. Liquidity risk, firm risk, and issue risk premium factors are examined as determinants of abnormal returns around the convertible bond issue dates. The market responds favorably to the issuance of convertible bonds by issuers with mild levels of firm volatility risk. Liquidity risk (issue size) and issue risk premium factors (convertible Vega) have significantly negative effects on abnormal returns around the issue date. The findings are robust to different grouping criteria and estimation methods.
| Author | : John John Puthenpurackal |
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| Total Pages | : 0 |
| Release | : 2002 |
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| Author | : Pollarat Ekkayokkaya |
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| Release | : 2011 |
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This thesis makes three main contributions to the literature on convertible bond financing. First, we provide a new theoretical explanation for convertible bond financing. Unlike the existing theory, our new theory provides a rationale for the issuance of both callable and non-callable convertible bonds. We also undertake empirical tests of the implications of the new theory and find that the new theory is supported by the empirical evidence. Second, we empirically examine the way in which firms choose the design of convertible bonds and investigate the effect of financial constraints on the firms' convertible design decision. Consistent with our new theory, we find that the design of convertible bonds is influenced by both adverse selection costs and financial distress costs. Moreover, we find that the design of convertible bonds for relatively constrained firms is determined in a different manner from the design of convertible bonds for relatively unconstrained firms. Our findings suggest that taking into account the effect of financial constraints is important in the understanding of convertible design decisions. To the best of our knowledge, our study is the first to document the effect of financial constraints on choice of convertible design. Third, we empirically examine two alternative explanations for the late call of a convertible bond: the "optimal" call theory of Butler (2002) and the financial distress costs theory of Jaffee and Shleifer (1990). In contrast to the existing evidence reported in Altintig and Butler (2005), we find that the observed late calls cannot be explained by the effect of the notice period as incorporated in the optimal call theory of Butler (2002). The observed conversion premium is much higher than Butler's optimal conversion premium. On the other hand, we find strong empirical support for the financial distress costs theory. Firms do not make a conversion-forcing call until the conversion premium is large enough to avoid a failed conversion, which could give rise to financial distress. We find that by the time a call is made, the probability of failed conversion is very small and the cross-sectional variation in the conversion premium is mainly explained by potential distress costs.
| Author | : Hyeong Joon Kim |
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| Total Pages | : 46 |
| Release | : 2017 |
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This study examines the announcement effect of convertible bond issue in Korea where the issuance of convertible bonds is increasing rapidly. We find that abnormal stock returns are positive for the firms with unusual high trading volume using a sample of listed firms in Korea Stock Exchange during 2000-2015. Moreover, we show that unusual high volume around convertibles issue announcement has positive correlation with capital expenditure when firm has valuable investment opportunities. Therefore, more favorable announcement returns are driven by capital expenditure decisions and the quality of investment opportunities. In the same sense, the impact of cash flow also depends on the issuer's quality of investment opportunities. Additionally, we confirm that issuing convertibles has negative signaling effect that stock of issuer is overvalued, and the issuer's volatility has negative impact around announcement date.
| Author | : Ming Dong |
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| Total Pages | : 52 |
| Release | : 2017 |
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We conduct interviews with financial managers in Australia, Canada, the U.K., and the U.S. to study the question why companies issue convertible bonds. For the vast majority of the firms, convertible bonds are chosen because managers find straight debt too costly. Convertible bonds are preferred to equity either because of the pecking order or because of managers' perceived equity undervaluation and share dilution. Our results suggest that managers time the issuance of convertible bonds based on the demand of the investors and the misvaluation of the firms' debt and equity. The evidence lends considerable support to the theory of management-investor differences in opinion about firm's risk, but yields very little support to the theories of risk shifting, sequential financing, or backdoor equity.
| Author | : Timo P. Korkeamaki |
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| Total Pages | : 30 |
| Release | : 2002 |
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Examining call protection terms offered by convertible bond issuers from countries with varying levels of shareholder protection and creditor protection provides an interesting previously unexplored method to observe whether firms adjust the design of their financing contracts depending on the nature of local law. The possibility of a forced conversion instituted by an early call is more threatening to investors in an economy where local laws provide less protection to shareholders. Likewise, in an economy where the legal infrastructure makes creditorship appealing, investors should prefer more debt-like contracts. I hypothesize that convertibles issued by firms from shareholder-friendly countries are more equity-like, and convertibles from creditor-friendly countries are more debt-like, and consequently the level of shareholder protection should be inversely related to call protection strength, and creditor protection should be positively related to it. I find strong evidence supportive of my hypothesis in a sample of 1,480 convertible bonds from 27 countries.
