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Why are conversion-forcing call announcements associated with negative wealth effects?

Author

Listed:
  • Grundy, Bruce D.
  • Veld, Chris
  • Verwijmeren, Patrick
  • Zabolotnyuk, Yuriy

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.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:corfin:v:24:y:2014:i:c:p:149-157
    DOI: 10.1016/j.jcorpfin.2013.10.003
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    References listed on IDEAS

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    Cited by:

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    3. 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.
    4. Hackney, John & Henry, Tyler R. & Koski, Jennifer L., 2020. "Arbitrage vs. informed short selling: Evidence from convertible bond issuers," Journal of Corporate Finance, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Convertible call announcement effects; Signaling; Price pressure; Dividend protection; Hedge funds;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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