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Stock Price Response to Calls of Convertible Bonds: Still a Puzzle?

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  • Ivan E. Brick
  • Oded Palmon
  • Dilip K. Patro

Abstract

The liquidity hypothesis predicts negative abnormal returns around the conversion‐forcing call announcements of convertible bonds, followed by a price recovery. We find the former but not the latter. The liquidity hypothesis also implies that the abnormal returns during the announcement and the post‐announcement periods should be related to proxies for the stock s liquidity. Again, our findings do not support these implications of the liquidity hypothesis. We conclude that the reason for the negative abnormal returns around the announcement of a conversion‐forcing call needs further examination.

Suggested Citation

  • Ivan E. Brick & Oded Palmon & Dilip K. Patro, 2007. "Stock Price Response to Calls of Convertible Bonds: Still a Puzzle?," Financial Management, Financial Management Association International, vol. 36(2), pages 1-21, July.
    • Handle: RePEc:bla:finmgt:v:36:y:2007:i:2:p:1-21:b
    DOI: 10.1111/j.1755-053X.2007.tb00087.x
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    Cited by:

    1. Caporale, Guglielmo Maria & Kang, Woo-Young, 2021. "On the preferences of CoCo bond buyers and sellers," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    2. Tobias Nigbur, 2015. "Calls of convertible debt securities: no bad news at all," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 29(1), pages 61-79, February.
    3. Ivan Brick & N. Chidambaran, 2008. "Board monitoring, firm risk, and external regulation," Journal of Regulatory Economics, Springer, vol. 33(1), pages 87-116, February.
    4. Bechmann, Ken L. & Lunde, Asger & Zebedee, Allan A., 2014. "In- and out-of-the-money convertible bond calls: Signaling or price pressure?," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 135-148.
    5. Fernando Díaz & Rodolfo Martell & Gabriel Ramírez, 2011. "Agency Effects in the Convertible Debt Puzzle: An Empirical Investigation," Working Papers 26, Facultad de Economía y Empresa, Universidad Diego Portales.
    6. Grundy, Bruce D. & Veld, Chris & Verwijmeren, Patrick & Zabolotnyuk, Yuriy, 2014. "Why are conversion-forcing call announcements associated with negative wealth effects?," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 149-157.
    7. Omar, Ayishat & Tang, Alex P., 2019. "Earnings management and convertible preferred stock calls," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 423-433.

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