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The signaling effects associated with convertible debt design

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  • Jung, Mookwon
  • Sullivan, Michael J.

Abstract

In this paper we investigate whether the terms used in the design of a convertible debt issue act as a signal of the issuing firm's future growth prospects. Our general premise is that convertible debt design terms are interrelated and arranged in a manner that signals asymmetric information to market participants. Empirical tests support our hypothesis, even after controlling for risk, firm size, time-to-maturity, and industry effects. Firms issuing convertible debt that arrange terms to take advantage of relatively better future growth prospects are found to have a relatively lower negative price reaction around the announcement of the offer.

Suggested Citation

  • Jung, Mookwon & Sullivan, Michael J., 2009. "The signaling effects associated with convertible debt design," Journal of Business Research, Elsevier, vol. 62(12), pages 1358-1363, December.
    • Handle: RePEc:eee:jbrese:v:62:y:2009:i:12:p:1358-1363
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    Cited by:

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    2. Chang, Saeyoung & Puthenpurackal, John, 2014. "Repurchases of convertible preferred stock and shareholder wealth," Journal of Business Research, Elsevier, vol. 67(4), pages 623-630.
    3. Cline, Brandon N. & Fu, Xudong & Tang, Tian, 2015. "Do investors value SEO lockup agreements?," Journal of Business Research, Elsevier, vol. 68(2), pages 314-321.

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