Why are conversion-forcing call announcements associated with negative wealth effectsα

Bruce D. Grundy; Chris Veld; Patrick Verwijmeren; Yuriy Zabolotnyuk

doi:10.1016/j.jcorpfin.2013.10.003

Why are conversion-forcing call announcements associated with negative wealth effectsα

Bruce D. Grundy^*, Chris Veld, Patrick Verwijmeren, Yuriy Zabolotnyuk

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

5 Citations (Scopus)

Abstract

We analyze call announcement returns taking into account two recent developments in the convertible bond market: the inclusion of dividend protection clauses in convertibles' terms, and the high fraction of convertible issues purchased by hedge funds. Calls of dividend-protected convertible bonds are predictable, yet we still observe a negative stock price reaction that cannot be explained by signaling. Greater hedge fund involvement prior to a call means less short selling in response to the call and we document a reduced price reaction. We conclude that price pressure and not signaling underlies the negative announcement effect of convertible bond calls.

Original language	English
Pages (from-to)	149-157
Number of pages	9
Journal	Journal of Corporate Finance
Volume	24
DOIs	https://doi.org/10.1016/j.jcorpfin.2013.10.003
Publication status	Published - Feb 2014
Externally published	Yes

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10.1016/j.jcorpfin.2013.10.003

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title = "Why are conversion-forcing call announcements associated with negative wealth effectsα",

abstract = "We analyze call announcement returns taking into account two recent developments in the convertible bond market: the inclusion of dividend protection clauses in convertibles' terms, and the high fraction of convertible issues purchased by hedge funds. Calls of dividend-protected convertible bonds are predictable, yet we still observe a negative stock price reaction that cannot be explained by signaling. Greater hedge fund involvement prior to a call means less short selling in response to the call and we document a reduced price reaction. We conclude that price pressure and not signaling underlies the negative announcement effect of convertible bond calls.",

keywords = "Convertible call announcement effects, Dividend protection, Hedge funds, Price pressure, Signaling",

author = "Grundy, {Bruce D.} and Chris Veld and Patrick Verwijmeren and Yuriy Zabolotnyuk",

year = "2014",

month = feb,

doi = "10.1016/j.jcorpfin.2013.10.003",

language = "English",

volume = "24",

pages = "149--157",

journal = "Journal of Corporate Finance",

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T1 - Why are conversion-forcing call announcements associated with negative wealth effectsα

AU - Grundy, Bruce D.

AU - Veld, Chris

AU - Verwijmeren, Patrick

AU - Zabolotnyuk, Yuriy

PY - 2014/2

Y1 - 2014/2

N2 - We analyze call announcement returns taking into account two recent developments in the convertible bond market: the inclusion of dividend protection clauses in convertibles' terms, and the high fraction of convertible issues purchased by hedge funds. Calls of dividend-protected convertible bonds are predictable, yet we still observe a negative stock price reaction that cannot be explained by signaling. Greater hedge fund involvement prior to a call means less short selling in response to the call and we document a reduced price reaction. We conclude that price pressure and not signaling underlies the negative announcement effect of convertible bond calls.

AB - We analyze call announcement returns taking into account two recent developments in the convertible bond market: the inclusion of dividend protection clauses in convertibles' terms, and the high fraction of convertible issues purchased by hedge funds. Calls of dividend-protected convertible bonds are predictable, yet we still observe a negative stock price reaction that cannot be explained by signaling. Greater hedge fund involvement prior to a call means less short selling in response to the call and we document a reduced price reaction. We conclude that price pressure and not signaling underlies the negative announcement effect of convertible bond calls.

KW - Convertible call announcement effects

KW - Dividend protection

KW - Hedge funds

KW - Price pressure

KW - Signaling

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DO - 10.1016/j.jcorpfin.2013.10.003

M3 - Article

SN - 0929-1199

VL - 24

SP - 149

EP - 157

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

ER -

Why are conversion-forcing call announcements associated with negative wealth effectsα

Abstract

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