Convertible Bond Calls: Resolution of the Information Content Puzzle

38 Pages Posted: 27 Jan 2003

See all articles by Sudip Datta

Sudip Datta

Wayne State University - Finance Department

Kartik Raman

Bentley University

Mai Iskandar-Datta

Wayne State University - Finance Department

Date Written: January 2003

Abstract

This study resolves the puzzling evidence on convertible bonds by documenting that conversion-forcing calls are indeed bad news. Supporting the long-term implications of Harris and Raviv (1985), we document that the common stocks of calling firms substantially underperform their benchmarks by a median of 64% over the five-year post-call period. In contrast, firms that choose not to call their in-the-money convertibles exhibit no long-run abnormal performance. We show that studies drawing conclusions based on short-term price reversal immediately following the call fail to completely capture the valuation effect that occurs over a longer time horizon. We document that the market condition at the time of the call (issuance volume) and cash flow benefits related to the call (relation between dividend and after tax coupon payment) influence the post-call stock price performance. Our analysis also reveals that the post-call underperformance of high-growth firms is more pronounced than that of low-growth firms, indicating greater market exuberance associated with high-growth firms at the time of the call.

Keywords: Convertible bond calls, Information content of convertible calls, Long-run post-call underperformance

JEL Classification: G14, G32

Suggested Citation

Datta, Sudip and Raman, Kartik and Iskandar-Datta, Mai E., Convertible Bond Calls: Resolution of the Information Content Puzzle (January 2003). Available at SSRN: https://ssrn.com/abstract=356180 or http://dx.doi.org/10.2139/ssrn.356180

Sudip Datta (Contact Author)

Wayne State University - Finance Department ( email )

328 Prentis Bldg.
5201 Cass Avenue
Detroit, MI 48202
United States
(313) 577- 0408 (Phone)
(313) 577-0058 (Fax)

Kartik Raman

Bentley University ( email )

175 Forest Street
Waltham, MA 02154
United States

Mai E. Iskandar-Datta

Wayne State University - Finance Department ( email )

328 Prentis Bldg.
5201 Cass Avenue
Detroit, MI 48202
United States
(313) 577-9509 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
421
Abstract Views
2,008
rank
95,744
PlumX Metrics